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CEO incentives and bank risk over the business cycle

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  • Ongena, Steven
  • Savaşer, Tanseli
  • Şişli Ciamarra, Elif

Abstract

We examine whether the relationship between managerial risk-taking incentives and bank risk is sensitive to the underlying macroeconomic conditions. We find that risk-taking incentives provided to bank executives are associated with higher bank riskiness during economic downturns. We attribute this finding to the increase in moral hazard during macroeconomic downturns when the perceived probability of future bailouts and government guarantees rises. This association is particularly strong for larger banks, banks that maintain lower capital ratios and banks that are managed by more powerful Chief Executive Officers (CEOs). Our findings highlight the importance of the interaction between managerial incentives and the macroeconomic environment. Boards and regulators may find it useful to consider the countercyclical nature of the relationship between risk-taking incentives and bank riskiness when designing managerial compensation.

Suggested Citation

  • Ongena, Steven & Savaşer, Tanseli & Şişli Ciamarra, Elif, 2022. "CEO incentives and bank risk over the business cycle," Journal of Banking & Finance, Elsevier, vol. 138(C).
  • Handle: RePEc:eee:jbfina:v:138:y:2022:i:c:s0378426622000607
    DOI: 10.1016/j.jbankfin.2022.106460
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    More about this item

    Keywords

    Bank risk; Executive compensation; Equity-based compensation; Macroeconomy;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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