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Resumo:
This paper proposes hybrid capital securities as a significant part of senior bank executive incentive compensation in light of Basel III, a new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. The committee developed Basel III in a response to the deficiencies in financial regulation brought about by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. The hybrid bank capital securities we propose for bank executives’ compensation are preferred shares and subordinated debt that the June 2004 Basel II regulatory framework recognised as other admissible forms of capital. The past two decades have witnessed dramatic increase in performance-related pay in the banking industry. Stakeholders such as shareholders, debtholders and regulators criticise traditional cash and equity-based compensation for encouraging bank executives’ excessive risk taking and short-termism, which has resulted in the failure of risk management in high profile banks during the global financial crisis. Paying compensation in the form of hybrid bank capital securities may align the interests of executives with those of stakeholders and help banks regain their reputation for prudence after years of aggressive risk-taking. Additionally, banks are desperately seeking to raise capital in order to bolster balance sheets damaged by the ongoing credit crisis. Tapping their own senior employees with large incentive compensation packages may be a viable additional source of capital that is politically acceptable in times of large-scale bailouts of the financial sector and economically wise as it aligns the interests of the executives with the need for a stable financial system.
Resumo:
It has long been supposed that preference judgments between sets of to-be-considered possibilities are made by means of initially winnowing down the most promising-looking alternatives to form smaller “consideration sets” (Howard, 1963; Wright & Barbour, 1977). In preference choices with >2 options, it is standard to assume that a “consideration set”, based upon some simple criterion, is established to reduce the options available. Inferential judgments, in contrast, have more frequently been investigated in situations in which only two possibilities need to be considered (e.g., which of these two cities is the larger?) Proponents of the “fast and frugal” approach to decision-making suggest that such judgments are also made on the basis of limited, simple criteria. For example, if only one of two cities is recognized and the task is to judge which city has the larger population, the recognition heuristic states that the recognized city should be selected. A multinomial processing tree model is outlined which provides the basis for estimating the extent to which recognition is used as a criterion in establishing a consideration set for inferential judgments between three possible options.