Edinburgh, Fife & East Scotland

Bonuses 'put banks at greater risk'

Money
Image caption The amount of risk taken by banks was a major factor in the credit crunch

Bankers are more likely to get their banks involved in risky deals when they are personally compensated for doing so, according to new research.

The Edinburgh University study looked at US bank acquisitions from 1993-2007.

Banks whose chief executives received substantial bonuses for completing acquisitions were more likely to carry out risky takeovers and mergers.

Researchers said the findings backed the case for regulating bankers' pay to encourage financial stability.

The study was carried out by researchers at Edinburgh University business school, working with colleagues at Leeds University, and published in the Journal of Corporate Finance.

They concluded that since high levels of bank risk - a major factor in the ongoing credit crunch - was a direct result of executive pay, regulators should consider limiting the incentives, such as stock options, that bankers receive.

Risk-taking incentives

Jens Hagendorff, lecturer at the University of Edinburgh business school, said: "Chief executive pay in banking is much more geared towards rewarding risk-taking than in any other industry.

"Our research shows that banking chief executives are clearly responsive to the risk-taking incentives they receive.

"Since concerns over financial stability are one of the main reasons for regulating banking, the links between risk-taking and chief executive pay support the case for regulating compensation in the banking industry."

Researchers found that during the 1993-2007 period studied, chief executives were offered increasingly large amounts of risk-based compensation.

They also found that banks whose chief executives received higher incentives engaged in riskier behaviour than they had previously.

Francesco Vallascas, lecturer in banking and finance at Leeds University business school, said: "With parts of the world still reeling from the sub-prime crisis, executive pay in the banking industry is more contentious than ever.

"But our results show a clear link between executive pay and risky behaviour in banks.

"Regulating bankers' pay is an issue that deserves consideration, no matter how controversial it is."

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