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

Boateng, Agyenim; Nguyen, Vu Hong Thai; Du, Min; Kwabi, Frank O.

Authors

Agyenim Boateng

Vu Hong Thai Nguyen

Frank O. Kwabi



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.

Journal Article Type Article
Acceptance Date Jun 10, 2021
Online Publication Date Jun 17, 2021
Publication Date 2022-04
Deposit Date Dec 10, 2021
Journal Empirical Economics
Print ISSN 0377-7332
Electronic ISSN 1435-8921
Publisher Springer
Peer Reviewed Peer Reviewed
Volume 62
Pages 1575-1598
DOI https://doi.org/10.1007/s00181-021-02086-4
Keywords CEO Compensation, Excess Reserves, Monetary Policy, Bank risk-taking
Public URL http://researchrepository.napier.ac.uk/Output/2828576