Seminar

Bank Capital Requirements for Tail Risk: The Internal Agency Problem Matters!

Nataliya Klimenko (Université Aix Marseille)

October 15, 2012, 12:30–14:00

Room MF 323

Fédération des Banques Françaises Seminar

Abstract

The top executives of banks made an important "contribution" to the 2007-09 financial crisis. Given short-term performance incentives, they were engaged in excessive risk-taking in order to receive immediate gains, without regard for the long-term consequences of management practices adopted. In order to curb the risk-taking propensity of bank executives, many scholars and policymakers now call for mandatory regulation of executive pay. However, it is still unclear how the optimal incentive compensation structure should look. In this paper we show that there is no need for the direct regulation of executive pay. In fact, the excessive risk-taking can be prevented implicitly, through the incentive mandatory recapitalization rule, which takes care of the internal agency problem between bank shareholders and bank managers.