Relative Performance, Banker Compensation, and Systemic Risk

47 Pages Posted: 12 Dec 2016 Last revised: 6 Nov 2017

See all articles by Rui A. Albuquerque

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics; Centre for Economic Policy Research (CEPR)

Jose Guedes

Universidade Católica Portuguesa

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Date Written: December 2016

Abstract

This paper shows that in the presence of correlated investment opportunities across banks, risk sharing between bank shareholders and bank managers leads to compensation contracts that include relative performance evaluation and to investment decisions that are biased toward such correlated opportunities, thus creating systemic risk. We analyze various policy recommendations regarding bank managerial pay and show that shareholders optimally undo the intended risk-reducing effects of the policies, demonstrating their ineffectiveness in curbing systemic risk.

Suggested Citation

Albuquerque, Rui A. and Cabral, Luis M. B. and Guedes, Jose, Relative Performance, Banker Compensation, and Systemic Risk (December 2016). CEPR Discussion Paper No. DP11693. Available at SSRN: https://ssrn.com/abstract=2884076

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

HOME PAGE: http://ruialbuquerque.webs.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-998-0858 (Phone)
212-998-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~lcabral

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jose Guedes

Universidade Católica Portuguesa ( email )

Lisbon
Portugal

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