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 language | English |
|---|---|
| Number of pages | 37 |
| Journal | Journal of Regulatory Economics |
| Early online date | 23 Mar 2018 |
| DOIs | |
| Publication status | Early online - 23 Mar 2018 |
Keywords
- bank regulation
- capital requirements
- mandatory deferral of compensation