NDLI: The Owner–Manager Conflict in Insured Banks: Predetermined Salary versus Bonus Payments

Content Provider	Springer Nature Link
Author	Schreiber, Ben Z.
Copyright Year	1997
Abstract	This article examines the incentive of a bank's owners and manager to increase the level of assets risk if bank deposits are insured. The model consists of three players: a public insurer (e.g., the FDIC), the bank's owners, and its manager. Empirical evidence has shown that the management of risk (e.g., credit and interest rate risk) and a low level of audit and control can be instrumental in causing banks to fail or get into financial difficulties. In the model, the form of compensation to the manager plays a crucial role in determining the level of asset risk. The article shows under which conditions and form of compensation bank's owners and manager have an incentive to raise the risk level. The model is run first under the assumption that the information between the bank and the insurer is symmetrical, and then under the assumption that it is asymmetrical for two forms of pay: a predetermined salary; and bonus payments whose value is not known at the time the contract between the owners and the manager is signed. The article also examines whether there is a Pareto-optimal contract between the owners and the manager as regards the risk level, given the two forms of pay. This question is important because the absence of such a contract could indicate the existence of a source of instability in the banking system.
Starting Page	303
Ending Page	326
Page Count	24
File Format	PDF
ISSN	09208550
Journal	Journal of Financial Services Research
Volume Number	12
Issue Number	2-3
e-ISSN	15730735
Language	English
Publisher	Kluwer Academic Publishers
Publisher Date	1997-01-01
Publisher Place	Boston
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Macroeconomics/Monetary Economics Finance /Banking
Content Type	Text
Resource Type	Article
Subject	Finance Accounting Economics and Econometrics

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4	Project PI / Joint PI	Principal Investigator and Joint Principal Investigators of the project	Dr. B. Sutradhar bsutra@ndl.gov.in Prof. Saswat Chakrabarti will be added soon
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