Avgouleas, E. and Cullen, J. (2015) Excessive leverage and bankers’ incentives: refocusing the debate. Journal of Financial Perspectives, 1 (3). 19 - 32. ISSN 2049-8640
Abstract
High leverage levels can lead to virtually limitless expansion of bank asset size, which maximizes, in the short- to-medium term, banks’ return on equity. In the absence of regulatory controls on leverage, all it takes to assume excessive risks, even for benign bankers, is to imitate competitor business strategies and herd. This form of herding is not solely motivated by compensation considerations but also by career (job retention/promotion) concerns. Namely, while bankers’ compensation has been a major factor behind bank short-termism and excessive risk-taking, the availability of high leverage entails serious agency costs even in the absence of compensation incentives. As a result, regulatory reforms that focus on regulation of private compensation contracts ought to be supplemented by well-calibrated leverage ratios. Otherwise, they are bound to produce, in the long-term, sub-optimal results, notwithstanding the conspicuous political gains of such a strategy.
Metadata
Item Type: | Article |
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Authors/Creators: |
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Editors: |
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Copyright, Publisher and Additional Information: | © 2015 EYGM Limited. |
Dates: |
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Institution: | The University of Sheffield |
Academic Units: | The University of Sheffield > Faculty of Social Sciences (Sheffield) > School of Law (Sheffield) |
Depositing User: | Symplectic Sheffield |
Date Deposited: | 11 Feb 2016 11:04 |
Last Modified: | 04 Nov 2016 01:57 |
Published Version: | https://www.gfsi.ey.com/the-journal-x.php?pid=11&i... |
Status: | Published |
Publisher: | Ernst & Young Global Ltd |
Refereed: | Yes |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:89101 |