Bank pay caps,bank risk,and macroprudential regulation |
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| Institution: | 1. Universitat de Barcelona, Barcelona, Spain;2. Jabre Capital Partners, Geneva, Switzerland;3. Getulio Vargas Foundation, Rio de Janeiro, Brazil;4. European Commission, Directorate General for Competition, Brussels, Belgium;5. Catholic University of Leuven, Leuven, Belgium;6. University de Barcelona, Faculty of Mathematics, 585 Gran Via de les Corts Catalanes, E-08007 Barcelona, Spain;1. Division of Economics and Business, Colorado School of Mines, 1500 Illinois St., Golden, CO 80401, USA;2. Department of Economics, McGill University, 855 Sherbrooke St. W., Montreal, Quebec H3A 2T7, Canada;1. Department of Accounting, Finance, and Economics, College of Business Administration, Winthrop University, 423 Thurmond Building, Rock Hill, SC 29733, United States;2. Department of Finance, Belk College of Business, University of North Carolina at Charlotte, 9201 University City Blvd., Charlotte, NC 28223, United States;1. Bradford School of Management, Emm Lane, University of Bradford, Bradford BD9 4JL, UK;2. Cardiff Business School, Colum Drive, University of Cardiff, Cardiff CF10 3EU, UK |
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| Abstract: | This paper studies the consequences of a regulatory pay cap in proportion to assets on bank risk, bank value, and bank asset allocations. The cap is shown to lower banks’ risk and raise banks’ values by acting against a competitive externality in the labour market. The risk reduction is achieved without the possibility of reduced lending from a Tier 1 increase. The cap encourages diversification and reduces the need a bank has to focus on a limited number of asset classes. The cap can be used for Macroprudential Regulation to encourage banks to move resources away from wholesale banking to the retail banking sector. Such an intervention would be targeted: in 2009 a 20% reduction in remuneration would have been equivalent to more than 150 basis points of extra Tier 1 for UBS, for example. |
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| Keywords: | Bank regulation Financial stability Bankers’ pay Bonus caps Capital conservation buffer |
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