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The impact of CEO compensation and excess reserves on bank risk-taking: the moderating role of monetary policy

Author

Listed:
  • Agyenim Boateng

    (De Montfort University Leicester)

  • Vu Hong Thai Nguyen

    (RMIT Vietnam University, RMIT Saigon South)

  • Min Du

    (De Montfort University Leicester)

  • Frank O. Kwabi

    (De Montfort University Leicester)

Abstract

We examine the effects of CEO compensation, excess reserves, and role of monetary policy on bank risk-taking behaviour based on a sample of 88 Chinese commercial banks over the period of 2003–2014. We find evidence that suggests that incentives present in CEO compensation contracts and excess reserves exert a positive and significant impact on risk-taking and credit risk. However, we find that the positive effects of CEO compensation and excess reserves on risk-taking are cancelled out by the interaction of CEO compensation and excess reserves. Further analysis suggests that the central bank’s monetary policy serves to restrain the effects of an interaction between CEO compensation and excess reserves on bank risk-taking and credit risk. This study extends the theoretical model, which indicates that excess reserves are a major source of credit risk, and notes that the effects of incentives inherent in CEO compensation contracts and excess reserves on bank risk policies are contingent on the monetary policy pursued by the central bank in China’s emerging economy.

Suggested Citation

  • Agyenim Boateng & Vu Hong Thai Nguyen & Min Du & Frank O. Kwabi, 2022. "The impact of CEO compensation and excess reserves on bank risk-taking: the moderating role of monetary policy," Empirical Economics, Springer, vol. 62(4), pages 1575-1598, April.
    • Handle: RePEc:spr:empeco:v:62:y:2022:i:4:d:10.1007_s00181-021-02086-4
    DOI: 10.1007/s00181-021-02086-4
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    2. Qiubin Huang, 2023. "Executive compensation and bank risk in China," Economics and Business Letters, Oviedo University Press, vol. 12(1), pages 62-67.

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