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Risk Managers in Banks

Author

Listed:
  • Efing, Matthias

    (HEC Paris)

  • Kampkötter, Patrick

    (University of Tuebingen)

  • Maurin, Vincent

Abstract

Some bank regulators warn that risk managers (RMs) will collude with banks' front offices (FOs) and rubberstamp investments if their bonuses depend on the performance of FOs. We show theoretically that positive pay correlation between FOs and RMs can instead be optimal. Based on data for German non-executive bank employees, we show empirically that performance pay is indeed positively correlated between RMs and FOs in practice. These pay correlations tend to be higher in banks with competent directors and in banks with stronger performance during the crisis of 2008, in line with our model predictions.

Suggested Citation

  • Efing, Matthias & Kampkötter, Patrick & Maurin, Vincent, 2020. "Risk Managers in Banks," HEC Research Papers Series 1388, HEC Paris.
    • Handle: RePEc:ebg:heccah:1388
    DOI: 10.2139/ssrn.3681255
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    Keywords

    risk management; governance; optimal contracts; pay-for-performance; risk-taking;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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