Finance Seminar joint with SAFE Visitors Program: Prof. Anjan Thakor, Ph.D. (Washington University in St. Louis)
Speaker: Prof. Anjan Thakor, Ph.D. (Washington University in St. Louis)
Title: Ethics and Talent in Banking
This paper develops a theory of optimal ethical standards in banking wherein two types of banks, one being protected by regulatory safety nets (\depositories") and the other not so protected (\shadow banks"), are innovating nancial products and competing for managerial talent. Ethical violations take the form of \mis-selling" products to customers who would not benet from them. Ethical violations entail nancial losses and regulatory penalties for the miscreant bank.
For any given level of penalties, banks choose higher ethical standards and experience fewer ethical violations when bank managers are more talented. However, banks adopting higher ethical standards experience managerial talent migration to banks with lower standards. This leads to an \ethical standards spillover" in that the ethical standard in one sector aects that in the other. In equilibrium, when the heterogeneity in managerial talent is low, endogenously-determined penalties are harsher and ethical standards are higher in depositories than in shadow banks, but consequently depositories end up hiring less talented managers and innovate less. The opposite is true when the heterogeneity in managerial talent is high. Higher capital also induces higher ethical standards in banks.
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