Bank capital requirements and mandatory deferral of compensation

Eberhard Feess, Ansgar Wohlschlegel

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    Abstract

    We analyze the interplay of capital requirements and mandatory deferral of compensation in reducing banks’ risk taking incentives. Two heterogenous banks fund uncorrelated projects with fully diversifiable risk or correlated projects with 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.
    Original languageEnglish
    Number of pages37
    JournalJournal of Regulatory Economics
    Early online date23 Mar 2018
    DOIs
    Publication statusEarly online - 23 Mar 2018

    Keywords

    • bank regulation
    • capital requirements
    • mandatory deferral of compensation

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