Journal article

Authors list: Bannier, Christina E.; Feess, Eberhard; Packham, Natalie

Publication year: 2013

Pages: 653-690

Journal: Review of Finance

Volume number: 17

Issue number: 2

ISSN: 1572-3097

eISSN: 1573-692X

DOI Link: https://doi.org/10.1093/rof/rfs002

Publisher: Oxford University Press

Abstract: 
Remuneration systems in the banking industry, in particular bonus payments, have frequently been blamed for contributing to the buildup of risks leading to the recent financial crisis. In our model, banks compete for managerial talent that is private information. Competition for talent sets incentives to offer bonuses inducing risk-taking that is excessive not only from society's perspective but also from the viewpoint of the banks themselves. In fact, bonus payments and excessive risk-taking are increasing with competition. Thus, our model offers a rationale why bonuses are paid even when reducing the expected profits of banks.

Harvard Citation style: Bannier, C., Feess, E. and Packham, N. (2013) Competition, Bonuses, and Risk-taking in the Banking Industry, Review of Finance, 17(2), pp. 653-690. https://doi.org/10.1093/rof/rfs002

APA Citation style: Bannier, C., Feess, E., & Packham, N. (2013). Competition, Bonuses, and Risk-taking in the Banking Industry. Review of Finance. 17(2), 653-690. https://doi.org/10.1093/rof/rfs002