Internal Reporting Systems, Compensation Contracts, and Bank Regulation

Finance & Accounting

Speaker:Alan Morrison, Said Business School, Oxford
Date: Friday 5 March 2010
Time: 2pm
Location: MBA LT

Further details

We examine the interdependency between loan officer compensation contracts and commercial bank internal reporting systems (IRSs). The optimal incentive contract for bank loan officers may require the bank headquarters to commit not to act on certain types of information. The headquarters can achieve this by running a basic reporting system that restricts information flow within the bank. Origination fees for loan officers emerge naturally as part of the optimal contract in our set-up. We examine the likely effect of the new Basel Accord upon IRS choice, loan officer compensation, and bank investment strategies. We argue that the new Accord reduces the value of commitment, and hence that it may reduce the number of projects financed by banks.