CONTROLLING BANKERS' BONUSES: EFFICIENT REGULATION OR POLITICS OF ENVY?

Authors


Kent Matthews is Professor of Banking at Cardiff Business School (matthewssk@cardiff.ac.uk).
Owen Matthews works at a leading City law firm (owen.d.matthews@gmail.com).

Abstract

The positive relationship between bank CEO compensation and risk-taking is a well-established empirical fact. The global banking crisis has resulted in a chorus of demands to control bankers' bonuses and thereby curtail their risk-taking activities in the hope that the world can avoid a repeat in the future. However, the positive relationship is not a causative one. In this paper we argue that an implicit too-big-to-fail policy provides the incentive for banks to take excessive risks and design compensation packages to deliver high returns. A credible no-bailout policy will have a better chance of curbing excess risk-taking than controlling bankers' compensation.

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