We develop a model of the joint capital structure decisions of banks and their borrowers. Strikingly high bank leverage emerges naturally from the interplay between two sets of forces. First, seniority and diversification reduce bank asset volatility by an order of magnitude relative to that of...

This paper proposes a new regulatory approach that implements capital requirements contingent on executive incentive schemes. We argue that excessive risk-taking in the financial sector originates from the shareholder moral hazard created by government guarantees rather than from corporate...

The extreme fragility of the financial system that gives rise to systemic risk and crises is rooted in the incentives of people within this system and the failure of regulation to counter these incentives. The same forces that increase systemic risk also distort credit markets, exacerbate...

Capital regulation is critical to address distortions and externalities from intense conflicts of interest in banking and from the failure of markets to counter incentives for recklessness. The approaches to capital regulation in Basel III and related proposals are based on flawed analyses of...

I discuss the motivations and actions (or inaction) of individuals in the financial system, governments, central banks, academia and the media that collectively contribute to the persistence of a dangerous and distorted financial system and inadequate, poorly designed regulations. Reassurances...

We analyse the principles for sound compensation practices at financial institutions and their implementation standards (briefly PSSCPs) issued in 2009 by the Financial Stability Board (FSB). We examine, first of all, the political economy of the PSSCP. We describe their formation as a result of...

In this Article we submit that the compensation structures at banks before the financial crisis were not necessarily flawed and that recent reforms in this area largely reflect already existing best practices. In Part I we review recent empirical studies on corporate governance and executive pay...

This paper examines the prospect of revitalizing asset-backed and non-agency mortgage-backed securitization markets rendered nearly dormant in the wake of the 2008 financial crisis. First, it briefly summarizes the background of the debacle and presents historical parallels for context. Then the...

We investigate the effect of managerial incentives and market power on bank risk-taking for a sample of 212 large US bank holding companies over 1997-2004 (i.e. 1,534 observations). Bank managers have incentives to prefer less risk while bank shareholders have preference for ‘excessive' risk....

Key points:• This article considers how the recent market turmoil affected national banking systems, thereby prompting state measures;• It describes the remuneration problems shown by the financial crisis: rewards for failure; short-term behaviour; inappropriate design of performance...