Bonus caps, deferrals and bankers' risk-taking

Arbeitspapier

Regulators restrict bankers' risk-taking by bonus caps or deferrals. We derive a structural model to analyze these compensation regulations and show that for a risk-neutral banker subject to positive switching costs of reducing bank risk, a bonus deferral is impotent while a sufficiently tight bonus cap reduces risk-taking. The model suggests that a bonus cap that equals fixed salary (as in the EU) reduces risk on average by 13% under conservatively calibrated positive switching costs. Further, the bonus cap would have considerably reduced risk-taking incentives in most US banks that did poorly during the global financial crisis. We also show that the bonus deferral is effective if the banker is risk-averse and the switching costs are not too high.

Object Details

• ISBN: 978-952-323-029-3
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Finland Research Discussion Papers ; No. 5/2015

Classification and Topics

• Classification: Wirtschaft ; Financial Crises ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation ; Compensation Packages; Payment Methods ; Personnel Economics: Compensation and Compensation Methods and Their Effects

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Jokivuolle, Esa ; Keppo, Jussi ; Yuan, Xuchuan
• Event: Veröffentlichung
• (who): Bank of Finland
• (where): Helsinki
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/212313
• Last update: 10.03.2025, 11:43 AM CET