Published in:Bank of England Working Paper ; No. 558
Extent:
1 Online-Ressource (37 p)
Language:
English
DOI:
10.2139/ssrn.2674040
Identifier:
Origination:
Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments July 25, 2016 erstellt
Description:
If a bank might be too-big-to-fail, then shareholders' optimal compensation contract encourages the executive to risk-shift on to the taxpayer. Standard risk-reducing regulatory compensation rules -- deferred pay, equity-linked pay, debt-like instruments in pay -- do not fully correct for excessive risk-taking caused by too-big-to-fail. By contrast, clawback regulations, or equivalently the performance bond, can incentivise the executive to make society's first-best risk choices, but only if accompanied by appropriate restrictions on the curvature of pay. Without these, optimising bank shareholders can neutralise the effect of clawback on the executive's project choice by offering a bonus which is sufficiently convex in equity value