|Researchers:||Tim Eisert, Christian Eufinger, Andrej Gill, Christian Hirsch, Uwe Walz|
|Category:||Transparency Lab, Systemic Risk Lab, Experiment Center, Financial Intermediation|
Topic and Objectives
The corporate governance of banks differs considerably from the governance of non-financial firms. Besides the traditional stakeholders (debt and equity holders), banks have the government as an additional stakeholder (directly via government ownership of banks and indirectly via e.g. bailout guarantees). Government interventions on corporate governance of banks result in incentives for banks to become interconnected.
Interconnectedness between banks is based on different channels. Besides the traditionally investigated channels, such as connection through interbank loans, derivatives etc., interconnectedness via social networks of bankers has recently become increasingly important. Managers and directors of banks often have social ties to other banks/firms managers that have an influence on the behavior of banks. These social ties potentially lead to e.g. higher investment correlation of different financial institutions and more homogenous behavior and thus to higher systemic risk.
The aim of this project was to address important aspects of the corporate governance of banks, including bank executives´ compensation schemes and their effects on capital structure and investment decisions of a bank. Furthermore, the project analyzed the incentives for banks to be interconnected as well as internal solutions for bank´s leverage and asset risk choices. The project relied on diverse methodologies, including microeconomic modelling, lab experiments as well as empirical analysis based on data from the field.
- Bank executives‘ compensation schemes have incentive effects on capital structure and investment decisions of a bank. If capital requirements of banks are made contingent on the compensation structure of bank’s executives, this can prevent excessive risk taking.
- The financial industry seems to attract more selfish and less trustworthy individuals. This may contribute to the lack of trust in its employees.
- Risk and capital choices are not only directly affected by changes in exogenous parameters, but are also indirectly influenced by the subsequent shift of the other decision variable, i.e. these two choice variables are interdependent. These indirect effects can potentially even outweigh the direct effects.
- It is beneficial from the individual point of view of banks to be highly interconnected and to engage in herding behavior. The reason is that banks have an incentive to exploit their implicit government guarantees by artificially channeling funds through the interbank market, which leads to high interconnectedness. Moreover, they are incentivized to invest in correlated portfolios to minimize contagion risks and thereby maximize the government subsidy per invested unit of capital.
|Christian Eufinger, Andrej Gill||
Incentive-Based Capital Requirements
|2017||Transparency Lab, Systemic Risk Lab, Experiment Center, Financial Intermediation||Basel III, capital regulation, compensation, leverage, risk|
|Tim Eisert, Christian Eufinger||
Interbank Networks and Backdoor Bailouts: Benefiting from Other Banks’ Government Guarantees
|2019||Transparency Lab, Systemic Risk Lab, Experiment Center, Financial Intermediation||bailout, cycle flows, cyclical liabilities, interbank network, leverage|
|10||Tim Eisert, Christian Eufinger||Interbank Network and Bank Bailouts: Insurance Mechanism for Non-Insured Creditors?||2013||Transparency Lab, Systemic Risk Lab, Experiment Center, Financial Intermediation||bailout, cycle flows, cyclical liabilities, interbank network, leverage|
|9||Christian Eufinger, Andrej Gill||Incentive-Based Capital Requirements||2013||Transparency Lab, Systemic Risk Lab, Experiment Center, Financial Intermediation||Basel III, capital regulation, compensation, leverage, risk|