Showing papers by "Joel Shapiro published in 2015"
TL;DR: In this paper, a theoretical model of shareholders, debtholders, depositors, and an executive suggests that excessive risk taking (in the form of risk shifting) may be addressed by basing compensation on both stock price and the price of debt (proxied by the credit default swap spread).
Abstract: This paper studies the connection between risk taking and executive compensation in financial institutions. A theoretical model of shareholders, debtholders, depositors, and an executive suggests that 1) in principle, excessive risk taking (in the form of risk shifting) may be addressed by basing compensation on both stock price and the price of debt (proxied by the credit default swap spread), but 2) shareholders may be unable to commit to designing compensation contracts in this way and indeed may not want to because of distortions introduced by either deposit insurance or naive debtholders. The paper then provides an empirical analysis that suggests that debt-like compensation for executives is believed by the market to reduce risk for financial institutions.
146 citations
TL;DR: In this paper, a regulator resolving a bank faces two audiences: depositors, who may run if they believe the regulator will not provide capital, and banks, which may take excess risk if they are willing to take risk when they believe a regulator will provide capital.
Abstract: A regulator resolving a bank faces two audiences: depositors, who may run if they believe the regulator will not provide capital, and banks, which may take excess risk if they believe the regulator will provide capital. When the regulator's cost of injecting capital is private information, it manages expectations by using costly signals: (i) A regulator with a low cost of injecting capital may forbear on bad banks to signal toughness and reduce risk taking, and (ii) A regulator with a high cost of injecting capital may bail out bad banks to increase confidence and prevent runs. Regulators perform more informative stress tests when the market is pessimistic.
60 citations
TL;DR: In this article, the authors propose a mechanism that gets banks to reveal their borrowing costs truthfully at no cost to the administrator, even when borrowing does not occur, by a whistleblower bank may contest another bank's report by revealing a transaction or stating a different rate at which the reporting bank could borrow.
Abstract: The investigations into LIBOR have highlighted that it is subject to manipulation. We propose a mechanism that gets banks to reveal their borrowing costs truthfully at no cost to the administrator. The mechanism works even when borrowing does not occur. First, banks report the rates at which they can borrow. Second, a whistleblower bank may contest another bank's report by revealing a transaction or stating a different rate at which the reporting bank could borrow. Third, the whistleblower's claim and the initial reported rate are confirmed or denied by the willingness of other banks to lend at these rates.
31 citations