Fine-Tuning Bank Governance and Resolution: The Case for Remunerating Bankers Through Bail-Inable Debt

Abstract

This paper proposes a radical change in the current remuneration practices, including bail-inable debt within the variable component of remuneration packages.

In supporting such claim, the paper sets the economic rationale for remuneration and explains the quintessential role of debt in banking. Against such a theoretical framework, the incumbent EU regulation reveals to be severely flawed.

Consequently, the paper shows why including bail-inable debt in remuneration packages provides incentives towards optimal risk-taking and develops a detailed policy proposal that focuses both on the content of the regulation and on the possible implementation strategies.

Keywords: Bank Governance, Remuneration, Capital Requirement Directive, Bank Resolution, Bail-inable debt, Stability, Resolvability, Managerial Incentives; Excessive Risk- taking; Material Risk-Takers

JEL Classification: G21; G35; K29