Risk Managers in Banks

72 Pages Posted: 18 Sep 2020 Last revised: 26 Oct 2023

See all articles by Matthias Efing

Matthias Efing

HEC Paris - Finance Department; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Patrick Kampkötter

University of Tuebingen - Department of Managerial Accounting

Vincent Maurin

HEC Paris - Finance Department; Swedish House of Finance

Date Written: September 30, 2020

Abstract

Some bank regulators warn that risk managers (RMs) will collude with banks' front offices (FOs) and rubberstamp investments if their bonuses depend on the performance of FOs. We show theoretically that positive pay correlation between FOs and RMs can instead be optimal. Based on data for German non-executive bank employees, we show empirically that performance pay is indeed positively correlated between RMs and FOs in practice. These pay correlations tend to be higher in banks with competent directors and in banks with stronger performance during the crisis of 2008, in line with our model predictions.

Keywords: risk management, governance, optimal contracts, pay-for-performance, risk-taking

JEL Classification: G20, G21, J3

Suggested Citation

Efing, Matthias and Kampkötter, Patrick and Maurin, Vincent, Risk Managers in Banks (September 30, 2020). HEC Paris Research Paper No. FIN-2020-1388, Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3681255 or http://dx.doi.org/10.2139/ssrn.3681255

Matthias Efing (Contact Author)

HEC Paris - Finance Department ( email )

France

HOME PAGE: http://matthiasefing.com/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Patrick Kampkötter

University of Tuebingen - Department of Managerial Accounting ( email )

Germany

Vincent Maurin

HEC Paris - Finance Department ( email )

France

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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