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The impact of CEO compensation and excess reserves on bank risk-taking: the moderating role of monetary policy

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Abstract

We examine the effects of CEO compensation, excess reserves, and role of monetary policy on bank risk-taking behaviour based on a sample of 88 Chinese commercial banks over the period of 2003–2014. We find evidence that suggests that incentives present in CEO compensation contracts and excess reserves exert a positive and significant impact on risk-taking and credit risk. However, we find that the positive effects of CEO compensation and excess reserves on risk-taking are cancelled out by the interaction of CEO compensation and excess reserves. Further analysis suggests that the central bank’s monetary policy serves to restrain the effects of an interaction between CEO compensation and excess reserves on bank risk-taking and credit risk. This study extends the theoretical model, which indicates that excess reserves are a major source of credit risk, and notes that the effects of incentives inherent in CEO compensation contracts and excess reserves on bank risk policies are contingent on the monetary policy pursued by the central bank in China’s emerging economy.

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Notes

  1. The risks generate severe adverse consequences with a small probability of being detected, but they offer generous compensation the rest of the time.

  2. Current account holding with the central bank beyond the statutory required and precautionary levels. We value involuntary excess reserves using the method employed by Agenor et al. (2004).

  3. Both methods for measuring CEO compensation produced similar results, confirming the robustness of our regression results.

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Authors and Affiliations

  1. Leicester Castle Business School, De Montfort University Leicester, Gateway House, Leicester, LE1 9BH, UK

    Agyenim Boateng, Min Du & Frank O. Kwabi

  2. RMIT Vietnam University, RMIT Saigon South, Ho Chi Minh City, Vietnam

    Vu Hong Thai Nguyen

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  1. Agyenim Boateng
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Appendix

Appendix

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Table 6 Summary statistics for excess reserve regression variables
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Table 7 Unit-root tests for excess reserve regression variables
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Table 8 Excess reserve regression results
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Table 9 CEO compensation regression results with crisis control
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Table 10 Moderating role of monetary policy with crisis control
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10.

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Boateng, A., Nguyen, V.H.T., Du, M. et al. The impact of CEO compensation and excess reserves on bank risk-taking: the moderating role of monetary policy. Empir Econ 62, 1575–1598 (2022). https://doi.org/10.1007/s00181-021-02086-4

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