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Optimal pay regulation for too-big-to-fail banks
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Thanassoulis, John and Tanaka, Mia (2018) Optimal pay regulation for too-big-to-fail banks. Journal of Financial Intermediation, 33 . pp. 83-97. doi:10.1016/j.jfi.2017.03.001 ISSN 1042-9573.
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Official URL: http://dx.doi.org/10.1016/j.jfi.2017.03.001
Abstract
This paper considers optimal executive pay regulations for banks that are too big-to-fail. Theoretically, we map the consequences of a series of commonly-used pay schemes, describing their relative optimality and ultimate societal consequences. We argue that in a world of too-big-to-fail policy, simple equity-linked remuneration schemes maximise shareholder value by incentivising executives to choose excessively risky projects at the expense of the taxpayer. We find that paying the executive partly in debt fails to mitigate the project choice distortion when debt markets are informed. By contrast, both clawback rules and linking pay to interest rates can incentivise the executive to make socially optimal risk choices, but only if they are accompanied by appropriate restrictions on the curvature of pay with respect to the bank's market value. Pay curvature can be generated by tools such as equity options and promotion policy. The policy implication is that unless regulators can enforce restrictions on pay curvature, bank shareholders can undermine the effectiveness of these pay regulations.
| Item Type: | Journal Article | ||||||||
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| Subjects: | H Social Sciences > HG Finance K Law [Moys] > KN Common Law, Private Law |
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| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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| Library of Congress Subject Headings (LCSH): | Financial institutions -- Law and legislation, Executives -- Salaries, etc., Financial crises, Banks and banking, International, Bankers -- Salaries, etc., Bank management, Banking law | ||||||||
| Journal or Publication Title: | Journal of Financial Intermediation | ||||||||
| Publisher: | Elsevier | ||||||||
| ISSN: | 1042-9573 | ||||||||
| Official Date: | January 2018 | ||||||||
| Dates: |
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| Volume: | 33 | ||||||||
| Page Range: | pp. 83-97 | ||||||||
| DOI: | 10.1016/j.jfi.2017.03.001 | ||||||||
| Status: | Peer Reviewed | ||||||||
| Publication Status: | Published | ||||||||
| Access rights to Published version: | Restricted or Subscription Access | ||||||||
| Date of first compliant deposit: | 30 March 2017 | ||||||||
| Date of first compliant Open Access: | 17 November 2018 |
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