Download or read book Bank Monitoring and CEO Risk Taking Incentives written by Anthony Saunders and published by . This book was released on 2017 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates whether monitoring by bank lenders affects CEO incentives of borrowing firms. We find that an increase in bank monitoring incentives significantly reduce the sensitivity of CEO wealth to stock return volatility (Vega). The results are more profound when bank lenders are more powerful and reputable and have a prior lending relationship with the borrowing firms. Additionally, Vega decreases after financial covenant violations and increases when bank lenders have offsetting equity stakes in borrowing firms. These results together suggest banks have a unique role in monitoring and shaping CEO incentives to mitigate the risk-shifting incentives of firm managers.
Download or read book CEO Incentives Relationship Lending and the Cost of Corporate Borrowing written by Liqiang Chen and published by . This book was released on 2016 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates how lending relationships attenuate the conflict of interest between creditors and shareholders that arises from CEO compensation contracts. We find that lending relationships mitigate the influence of CEO risk-taking incentives on loan spreads, especially for informationally-opaque firms. In addition, lending relationships also attenuate the impacts of CEO risk-taking incentives on maturity and collateral requirements. This study highlights the importance of bank monitoring through lending relationships to mitigate managerial risk-shifting activities that arise from equity incentives.
Download or read book Corporate Financial Distress and Bankruptcy written by Edward I. Altman and published by John Wiley & Sons. This book was released on 2010-03-11 with total page 314 pages. Available in PDF, EPUB and Kindle. Book excerpt: A comprehensive look at the enormous growth and evolution of distressed debt, corporate bankruptcy, and credit risk default This Third Edition of the most authoritative finance book on the topic updates and expands its discussion of corporate distress and bankruptcy, as well as the related markets dealing with high-yield and distressed debt, and offers state-of-the-art analysis and research on the costs of bankruptcy, credit default prediction, the post-emergence period performance of bankrupt firms, and more.
Download or read book Monetary Policy Leverage and Bank Risk Taking written by Mr.Luc Laeven and published by International Monetary Fund. This book was released on 2010-12-01 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide a theoretical foundation for the claim that prolonged periods of easy monetary conditions increase bank risk taking. The net effect of a monetary policy change on bank monitoring (an inverse measure of risk taking) depends on the balance of three forces: interest rate pass-through, risk shifting, and leverage. When banks can adjust their capital structures, a monetary easing leads to greater leverage and lower monitoring. However, if a bank's capital structure is fixed, the balance depends on the degree of bank capitalization: when facing a policy rate cut, well capitalized banks decrease monitoring, while highly levered banks increase it. Further, the balance of these effects depends on the structure and contestability of the banking industry, and is therefore likely to vary across countries and over time.
Download or read book Managerial Compensation Regulation and Risk in Banks written by Vittoria Cerasi and published by . This book was released on 2014 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the relation between CEOs monetary incentives, financial regulation and risk in banks. We present a model where banks lend to opaque entrepreneurial projects to be monitored by managers; managers are remunerated according to a pay-for-performance scheme and their effort is unobservable to depositors and shareholders. Within a prudential regulatory framework that defines a capital requirement and a deposit insurance, we study the effect of increasing the variable component of managerial compensation on risk taking. We then test empirically how monetary incentives provided to CEOs in 2006 affected banks' stock price and volatility during the 2007-2008 financial crisis on a sample of large banks around the World. The cross-country dimension of our sample allows us to study the interaction between CEO incentives and financial regulation. The empirical analysis suggests that the sensitivity of CEOs equity portfolios to stock prices and volatility has been indeed related to worse performance in countries with explicit deposit insurance and weaker monitoring by shareholders. This evidence is coherent with the main prediction of the model, that is, the variable part of the managerial compensation, combined with weak insiders' monitoring, exacerbates the risk-shifting attitude by managers.
Download or read book Executive Compensation and Business Policy Choices at U S Commercial Banks written by Robert DeYoung and published by . This book was released on 2019 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study examines whether and how the terms of CEO compensation contracts at large, publicly traded commercial banks between 1994 and 2006 influenced, and were influenced by, the risk-profiles of these firms. We find evidence linking contractual risk-taking incentives, which we proxy with standard measures of vega and delta, to risk-increasing business policy choices. Moreover, these linkages became stronger after 1999, when financial industry deregulation created new growth opportunities for commercial banks. Our results suggest that compensation committees provided new incentives for bank CEOs to exploit these growth opportunities, and also to shift from traditional on-balance sheet portfolio lending to less traditional investments (e.g., private-issue mortgage-backed securities) and nontraditional fee-generating activities. Apart from these strategic reallocations, our results also suggest that bank boards designed CEO compensation contracts to limit excessive risk taking, especially after deregulation.
Download or read book Bank CEOs written by Claudia Curi and published by Springer. This book was released on 2018-05-22 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book thoroughly explores the characteristics and importance of bank CEOs against the backdrop of growing awareness of the social implications of CEO behavior for the performance and stability of the financial and economic system. After an introductory section on the relevance of CEOs in the banking industry, the connections between the bank CEO labor market, contractual incentives, and compensation structures are examined. The focus then turns to empirical findings concerning the impact that bank CEO compensation has on various firm-level outcomes, such as bank performance and strategies. In addition, the relation between CEO turnover and changes in compensation policies since the financial crisis is discussed. A concluding section presents some fresh empirical evidence deriving from an up-to-date database of traits of CEOs operating in the largest European banks. For PhD students and academics, the surveys offer detailed roadmaps on the empirical research landscape and provide suggestions for future work. The writing style ensures that the content will be readily accessible to all industry practitioners.
Download or read book Bank Leverage and Monetary Policy s Risk Taking Channel written by Mr.Giovanni Dell'Ariccia and published by International Monetary Fund. This book was released on 2013-06-06 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present evidence of a risk-taking channel of monetary policy for the U.S. banking system. We use confidential data on the internal ratings of U.S. banks on loans to businesses over the period 1997 to 2011 from the Federal Reserve’s survey of terms of business lending. We find that ex-ante risk taking by banks (as measured by the risk rating of the bank’s loan portfolio) is negatively associated with increases in short-term policy interest rates. This relationship is less pronounced for banks with relatively low capital or during periods when banks’ capital erodes, such as episodes of financial and economic distress. These results contribute to the ongoing debate on the role of monetary policy in financial stability and suggest that monetary policy has a bearing on the riskiness of banks and financial stability more generally.
Download or read book Bailouts and Systemic Insurance written by Mr.Giovanni Dell'Ariccia and published by International Monetary Fund. This book was released on 2013-11-12 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: We revisit the link between bailouts and bank risk taking. The expectation of government support to failing banks creates moral hazard—increases bank risk taking. However, when a bank’s success depends on both its effort and the overall stability of the banking system, a government’s commitment to shield banks from contagion may increase their incentives to invest prudently and so reduce bank risk taking. This systemic insurance effect will be relatively more important when bailout rents are low and the risk of contagion (upon a bank failure) is high. The optimal policy may then be not to try to avoid bailouts, but to make them “effective”: associated with lower rents.
Download or read book Bovernance and Bank Valuation written by Gerard Caprio and published by World Bank Publications. This book was released on 2003 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: "Which public policies and ownership structures enhance the governance of banks? This paper constructs a new database on the ownership of banks internationally and then assesses the ramifications of ownership, shareholder protection laws, and supervisory/regulatory policies on bank valuations. Except in a few countries with very strong shareholder protection laws, banks are not widely held, but rather families or the State tend to control banks. We find that (i) larger cash flow rights by the controlling owner boosts valuations, (ii) stronger shareholder protection laws increase valuations, and (iii) greater cash flow rights mitigate the adverse effects of weak shareholder protection laws on bank valuations. These results are consistent with the views that expropriation of minority shareholders is important internationally, that laws can restrain this expropriation, and concentrated cash flow rights represent an important mechanism for governing banks. Finally, the evidence does not support the view that empowering official supervisory and regulatory agencies will increase the market valuation of banks"--NBER website
Download or read book Merger Decisions written by Federal Deposit Insurance Corporation and published by . This book was released on with total page 196 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The Bankers New Clothes written by Anat Admati and published by Princeton University Press. This book was released on 2024-01-09 with total page 624 pages. Available in PDF, EPUB and Kindle. Book excerpt: A Wall Street Journal, Financial Times, and Bloomberg Businessweek Book of the Year Why our banking system is broken—and what we must do to fix it New bank failures have been a rude awakening for everyone who believed that the banking industry was reformed after the Global Financial Crisis—and that we’d never again have to choose between massive bailouts and financial havoc. The Bankers’ New Clothes uncovers just how little things have changed—and why banks are still so dangerous. Writing in clear language that anyone can understand, Anat Admati and Martin Hellwig debunk the false and misleading claims of bankers, regulators, politicians, academics, and others who oppose effective reform, and they explain how the banking system can be made safer and healthier. Thoroughly updated for a world where bank failures have made a dramatic return, this acclaimed and important book now features a new preface and four new chapters that expose the shortcomings of current policies and reveal how the dominance of banking even presents dangers to the rule of law and democracy itself.
Download or read book Incentive Features in CEO Compensation written by Kose John and published by . This book was released on 2008 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study CEO compensation in the banking industry by taking into account banks unique claim structure in the presence of two types of agency problems: the standard managerial agency problem as well as the risk-shifting problem between shareholders and debtholders. We empirically test two hypotheses derived from this framework: (1) the pay-for-performance sensitivity of bank CEO compensation decreases with the total leverage ratio; and (2) the pay-for-performance sensitivity of bank CEO compensation increases with the intensity of monitoring provided by regulators and nondepository (subordinated) debtholders. We construct an index of the intensity of outsider monitoring based on four variables: subordinated debt ratio, subordinated debt rating, non performing loan ratio and BOPEC rating assigned by regulators. We findsupporting evidence for both hypotheses. Our results hold after controlling for the endogeneity among compensation, leverage and monitoring. They are robust to various regression specifications and sample criteria.
Download or read book BANK HOLDING COMPANY GOVERNANCE OPACITY AND RISK written by Gang Bai and published by . This book was released on 2013 with total page 132 pages. Available in PDF, EPUB and Kindle. Book excerpt: As financial intermediaries, banks are "special" because they play an important role in transferring funds from surplus spending units to deficit spending units and serve as a channel of monetary policy. Therefore, the safety and soundness of banks is essential to the financial stability and economic development. This study investigates how bank governance mechanisms, namely, executive compensation and board of directors, affect bank safety. Given the unique nature that bank assets are opaque, bank governance is expected to be different from corporate governance of industrial firms. This study also investigates how the opaqueness nature of bank assets affects the compensation design of bank executives. Chapter 1 investigates the association between asset opacity and CEO pay-performance sensitivity of bank holding companies (BHCs). Contrary to the monitoring cost hypothesis according to which when information asymmetry is high firms rely more heavily on equity-based compensation, I find that when the share of opaque assets in total assets increases, pay-performance sensitivity in BHCs declines. This finding supports the view that when the share of opaque assets increases, managers can pursue risky projects to a greater extent in the interests of shareholders but at the expenses of bondholders, and, hence, the optimal compensation structure in BHCs with larger share of opaque assets has a lower pay-performance sensitivity to restrain managerial risk-taking incentives, reducing the conflicts of interests between shareholders and bondholders. The negative effect of asset opacity on pay-performance sensitivity is robust after accounting for the endogeneity of asset opacity and using various compensation measures. In addition, I find that higher pay-performance sensitivity generally leads to a greater share of opaque assets in total assets. The results of this study suggest that asset opacity is an important determinant of compensation structure in the banking industry. BHCs should use caution when using stocks and options to promote prudent risk taking under bank asset opacity conditions because opaque bank assets make risk-shifting behaviors induced by equity-based compensation difficult to monitor, threatening the bank stability. Regulators should also account for this opacity effect. Chapter 2 investigates the relationship between insolvency risk and executive compensation for BHCs over the 1992-2008 period. I employ CEO compensation sensitivity to risk (vega) and pay-share inequality between the CEO and other executives as measures of compensation and employ a simultaneous equation model to account for the endogeneity problem between vega and risk. Five main results are obtained. First, CEO compensations in BHCs have risen in response to deregulation to resemble those of the industrial firms. Second, higher vegas lead to greater bank instability. Third, the association between bank stability and managerial compensation is bi-directional; higher vegas induce greater risk and vice versa. Fourth, BHCs in the next to the largest-size group increase CEO vegas the most and have the strongest potential to create instability in the financial industry, such as the one witnessed in 2007-2009. Fifth, increased pay-share inequality has effects opposite to those of the increase in vega; greater pay-share inequality is associated with greater bank stability. Implications of executive compensation effects on instability for depositors, deposit insurers and regulators are drawn. Chapter 3 investigates the association between the structure of board of directors and risk taking of bank holding companies. I use the number of directors on the risk committee and the frequency of its meetings to measure the strength of risk management exercised by bank boards. Several interesting findings are obtained. First, banks with stronger risk committees, namely risk committees with a greater number of directors and more frequent meetings, are associated with more diversified loan portfolios, greater amounts of safer loans, less mortgage-backed securities, and lower market risk. These results continue to hold even after controlling for the possible endogeneity problem using the dynamic panel GMM estimator. Overall, these results suggest that stronger risk management by bank boards has a positive and significant impact on banks' safety and soundness. Second, the percentage of banks having a risk committee has been increasing steadily since 1999, suggesting bank boards have gradually taken a greater role in risk management and their fiduciary duties have expanded beyond shareholders to include depositors. However, less than half of bank boards have a risk committee before 2007, suggesting weak risk management at the top level and the possibility that bank boards may have failed to control the excessive risk-taking in the banking industry leading to the recent financial crisis. Finally, the percentage of banks with a risk committee is still less than 60% after the crisis, suggesting that depositors and bank supervisors could enhance the stability of banks by further improving the effectiveness of internal risk control at bank boards.
Download or read book The Effect of Creditor Rights on Bank Monitoring Capital Structure and Risk Taking written by Sudarshan Jayaraman and published by . This book was released on 2013 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the multi-faceted effect of creditor rights on the way banks monitor, operate and finance themselves. We present a simple analytical model that shows that a strengthening of creditor rights reduces the need for banks to monitor their borrowers; and that banks, as a result, tilt their capital structures away from capital that provides the strongest monitoring incentives. To determine whether this capital is deposits or equity, we use the staggered passage of legal reforms across countries as identifying variation in creditor rights, and find that banks tilt their capital structures away from equity and towards deposits when creditor rights become stronger. These results suggest that bank equity, rather than deposits, is the predominant form of monitoring-inducing capital. Next, we examine how creditor rights and the ensuing increase in bank leverage affect bank risk-taking. We find that increases in creditor rights increase bank risk-taking, but only in countries with government safety nets that encourage risk-shifting, not in countries without such perverse incentives. We also find that a strengthening of creditor rights results in an increase in banks' cost of debt, but here too only in countries with government safety nets. These results indicate that lenders punish banks' higher risk-shifting propensities with higher costs of debt. Overall, our study sheds light on the complex role of country-level creditor rights on the way banks within the country function, and in doing so, contrasts the effect of creditor rights on banks from that on industrial firms.
Download or read book The Handbook of the Economics of Corporate Governance written by Benjamin Hermalin and published by Elsevier. This book was released on 2017-09-18 with total page 762 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Handbook of the Economics of Corporate Governance, Volume One, covers all issues important to economists. It is organized around fundamental principles, whereas multidisciplinary books on corporate governance often concentrate on specific topics. Specific topics include Relevant Theory and Methods, Organizational Economic Models as They Pertain to Governance, Managerial Career Concerns, Assessment & Monitoring, and Signal Jamming, The Institutions and Practice of Governance, The Law and Economics of Governance, Takeovers, Buyouts, and the Market for Control, Executive Compensation, Dominant Shareholders, and more. Providing excellent overviews and summaries of extant research, this book presents advanced students in graduate programs with details and perspectives that other books overlook. - Concentrates on underlying principles that change little, even as the empirical literature moves on - Helps readers see corporate governance systems as interrelated or even intertwined external (country-level) and internal (firm-level) forces - Reviews the methodological tools of the field (theory and empirical), the most relevant models, and the field's substantive findings, all of which help point the way forward
Download or read book Who Disciplines Bank Managers written by Andrea M. Maechler and published by International Monetary Fund. This book was released on 2009-12-01 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: We bring to bear a hand-collected dataset of executive turnovers in U.S. banks to test the efficacy of market discipline in a 'laboratory setting' by analyzing banks that are less likely to be subject to government support. Specifically, we focus on a new face of market discipline: stakeholders' ability to fire an executive. Using conditional logit regressions to examine the roles of debtholders, shareholders, and regulators in removing executives, we present novel evidence that executives are more likely to be dismissed if their bank is risky, incurs losses, cuts dividends, has a high charter value, and holds high levels of subordinated debt. We only find limited evidence that forced turnovers improve bank performance.
