Research On The Impact Of Executive Incentives On Risk-taking Of Commercial Banks

Executive incentive is an important institutional arrangement in corporate governance of commercial banks.At present,China’s banking risk events and risky radical behaviors occur frequently,which is due to the existence of certain defects in the corporate governance of China’s commercial banks.In corporate governance,executive incentive is the most important issue,which is related to the driving force of corporate governance in the banking industry.If there is too much incentive,the bank may have a risk problem,and if there is not enough incentive,the executive effort will be insufficient.Therefore,the importance of executive incentives to the banking industry is self-evident.A good executive incentive mechanism can motivate executives to improve the operating conditions of the bank and restrain the risky and aggressive behaviors of executives.On the other hand,if a bank’s executive incentives only focus on short-term benefits without considering the factors of risk taking,senior executives will have insufficient motivation for risk control and are more likely to have short-sighted behaviors.Therefore,the study of executive incentive is of great significance for the sound operation of the banking industry and the improvement of corporate governance.This paper selects three typical executive incentives,namely monetary compensation incentive,promotion incentive and deferred compensation incentive.Firstly,it lays a theoretical foundation for future research by combing relevant theories such as principal and agent.Then,three kinds of incentive forms are corresponding to linear incentive,convex incentive and concave incentive respectively.Then the definitions of linear,convex and concave incentives are given,and the different relationships between incentive levels and risk-taking levels under three types of incentives are shown graphically.Then through the literature review,we find the impact of these three incentives on bank risk-taking under different mechanisms.Then,this paper begins to conduct empirical analysis.Firstly,this paper uses the data of 40 listed banks from 2008 to 2019 to study the relationship between executive monetary compensation incentives,credit in the real estate industry and bank risk taking through the mediating effect model.Secondly,this paper collects data from 142 commercial banks in China from 2008 to 2018.By propensity score matching estimation,this paper empirically analyzes the impact of bank executive promotion on risk-taking and its mechanism.Thirdly,based on the promulgation of the Guidelines on the Regulation of Sound Compensation in Commercial Banks,this paper conducts a quasi-natural experiment with 102 commercial banks in China as samples,and uses the differential differential model to investigate the impact of delayed payment of executive compensation on bank risk-taking.Through empirical analysis,this paper draws the following conclusions:First,executive monetary compensation incentive can improve the risk-taking level of banks,in which the level of active risk-taking increases,indicating that the risk-taking consciousness of banks has been enhanced,which is a positive influence.The negative impact is that the risk tolerance of banks has increased.Although there will not be bad debts and other risk problems in the short term,there are hidden risks.However,executive monetary compensation incentive will have an indirect effect on bank risk taking through the real estate industry credit,and there is an intermediary effect.Second,except for executives who are nearing retirement,executive promotion will increase the risk taking of Chinese banks,and there are convex incentives for executive promotion.Further mechanism research shows that in the process of executive promotion,the concern loan at the critical part of non-performing loans increases rapidly,and the risk cover-up behavior is obvious.Company loan has risen,the risk is not dispersed enough,the risk concentration behavior is outstanding.Mortgage lending is down while credit is up,risk exposure is up and risk-free behaviour is justified.Robustness test further supports the conclusion of this paper.Third,the policy of deferred compensation can effectively reduce the level of risk taking of banks.This evidence directly confirms the internal debt theory and affirms the entrenchment effect and causality of executive compensation incentive in bank risk transfer.However,the effect of deferred compensation on banks’ risk-taking level is only limited to three years after the deferred payment,and the bank’s earnings management behavior in loan loss provisions has been strengthened,which indicates that the current deferred compensation policy still has defects.According to the above conclusions,this paper finds that there are some deficiencies in these three incentive mechanisms.Based on this,this paper puts forward suggestions to further improve the incentive and risk management of senior executives in China’s banking industry from four aspects:selection mechanism,incentive mechanism,constraint mechanism and supervision mechanism.In terms of selection mechanism,we should make use of property right constraint to improve the selection and appointment mechanism of banking executives,and optimize the current professional manager market of banks.In terms of incentive mechanism,it is necessary to improve the executive evaluation system of the banking industry and differentiate the executive incentives of the banking industry.In terms of the restraint mechanism,the internal governance and management of the bank should be separated so as to achieve mutual checks and balances.The real compensation recovery and withholding system should be implemented to restrain the risky and aggressive behaviors of senior executives.In terms of the supervision mechanism,it is necessary to improve the disclosure of executive incentives and other relevant information to enhance external supervision.It is also necessary to improve the regular evaluation mechanism of bank executive compensation system to ensure the sound operation of banks.The main innovations of this paper are as follows:First,according to the risk characteristics of incentive methods and the difference of corresponding stakeholders,executive incentives are divided into linear incentives,convex incentives and concave incentives.Then,these three incentives are defined and graphically,and the impact of these three incentives on bank risk-taking is studied.Second,this paper uses five kinds of risk-taking measurement methods(a total of seven risk-taking indicators),which correspond to different meanings,complement each other and deepen the understanding of the concept of bank risk-taking.Third,through the empirical results of active risk-taking,Chapter 3 of this paper finds that monetary compensation incentives for senior executives can improve banks’risk-taking consciousness,which indicates that monetary compensation incentives will not only improve banks’ risk-taking level,but also bring positive effects,which is a new finding.Fourth,this chapter 4 through the executives promotion manual data to carry on the empirical analysis,found the executives in the process of the promotion with the "risk" to hide,"risk"and "no risk" three bank risk-taking behavior,and combining the convexity of motivation theory to graphical analysis,this research is also different.