University of Vienna
Dept. of Finance
Oskar Morgenstern Platz 1
1090 Vienna, Austria
Bank Regulation, CEO Compensation, and Boards (2017), Review of Finance 21, 1901-1932.
joint with Christian Laux and Gyöngyi Lóránth
Abstract: We analyze the limits of regulating bank CEO compensation to reduce risk shifting in the presence of an active board that retains the right to approve new investment strategies. Compensation regulation prevents overinvestment in strategies that increase risk, but it is less effective in preventing underinvestment in strategies that reduce risk. The regulator optimally combines compensation and capital regulation. In contrast, if the board delegates the choice of strategy to the CEO, compensation regulation is sufficient to prevent both types of risk shifting. Compensation regulation increases shareholders' incentives to implement an active board, which reduces the effectiveness of compensation regulation.
Working Papers and Research Projects
Financing and Resolving Banking Groups (2019), available on request.
joint with Albert Banal-Estañol and Gyöngyi Lóránth
Abstract: We study the formation and resolution of multi-unit banking groups. Banking groups create financing synergies by transferring financing capacity across subsidiaries. Single-point-of-entry (SPOE) resolution imposes a single balance sheet on the banking group. This allows the regulator to shift resources across banking units upon resolution, thus permitting the ex-post efficient continuation of units that are hit by negative liquidity shocks. However, SPOE resolution can also prevent the ex-ante efficient formation of banking groups because outside investors take the ex-post transfers into account. Multiple-point-of-entry (MPOE) resolution separates banking units and maintains limited liability within the group. Separate resolution can commit the regulator to shut down units, which reduces the ex-post required financing capacity and may ease the ex-ante financing constraints. MPOE resolution is efficient when it enables the formation of a banking group that would not from under SPOE. Offering banks a choice between SPOE and MPOE resolution increases efficiency relative to the adoption of a single resolution regime for all banks. Resolution improves outcomes relative to friction-less private financial restructuring.
Debt Maturity Structure and Liquidity Shocks (2019)
joint with Christian Laux and Gyöngyi Lóránth
Abstract: We analyze the role of a firm’s debt maturity structure when refinancing its debt after a liquidity shock that reduces the firm’s cash flow. Staggered debt diminishes the share of outstanding debt that a firm has to refinance at any given time, which should be most beneficial for highly levered firms. However, we show that for highly levered firms, a firm’s ability to roll over its maturing debt hinges on its ability to prefinance its outstanding debt expiring in future periods. Prefinancing involves holding sufficient cash to repay the outstanding debt when it expires and eliminates the potential benefits of staggered debt. If agency problems prevent a firm from holding sufficient cash to implement this strategy, then staggered debt can reduce a firm’s ability to withstand a negative cash flow shock.
Staggered Debt, Banks' Liquidity, and its Regulation (2017), available on request.
joint with Gyöngyi Lóránth
Abstract: This paper explores the impact of staggered versus concentrated debt structures on banks' ability to survive unexpected cash flow shocks. We show that the amount of cash that a bank needs to roll over its maturing debt when it is hit by negative cash flow shock does not depend on whether its debt is staggered or concentrated. For a constant cash storage policy, banks with concentrated debt have a higher probability to survive negative cash flow shocks. Liquidity requirements that resemble the Basel III Liquidity Coverage Ratio provide incentives for banks to stagger their debt, because this allows banks to reduce the amount of cash they need to hold. Alternative forms of liquidity regulation do not suffer this drawback.
Risk Weighted Capital Requirements with Private Information (2017)
Securitization, Shadow Banking, and Bank Regulation (2015)
Abstract: This paper studies the capital regulation of banks that choose whether to become traditional, deposit taking banks or shadow banks that provide credit intermediation through securitization. If capital regulation only covers traditional banks, it will lead to the emergence of excessively risky shadow banks that can fully crowd out traditional banking. Optimal capital regulation includes shadow banks and can prevent excessive risk taking and crowding-out by ensuring that banks' equity per unit of investment remains the same for all securitization strategies. Capital requirements cause underinvestment that cannot be mitigated by securitization.