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- Title
Bank capital requirements and mandatory deferral of compensation.
- Authors
Feess, Eberhard; Wohlschlegel, Ansgar
- Abstract
We analyze the interplay of capital requirements and mandatory deferral of compensation in reducing banks' risk taking incentives. Two heterogenous banks fund uncorrelated projectswith fully diversifiable risk or correlated projectswith systematic risk. One of both banks can identify project types and is superior at managing risks. If projects are in abundant supply, full mandatory deferral of compensation is optimal as it allows a larger banking sector without increasing the default risk. With limited supply of projects, deferred compensation may misallocate risky projects to the bank that is inferior at managing risks, so that early compensation may be optimal.
- Publication
Journal of Regulatory Economics, 2018, Vol 53, Issue 2, p206
- ISSN
0922-680X
- Publication type
Academic Journal
- DOI
10.1007/s11149-018-9352-3