The role of incentives within banks

• Applicants: Professor Dr. Alois Kneip, since 8/2016; Professor Jörg Rocholl, Ph.D.
• Subject Area: Economic Policy, Applied Economics
• Term: from 2014 to 2017
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 260444819

Short-term, volume-based incentives for bank employees have been blamed for excessive risk-taking and the recent financial crisis. Consequently, regulation of compensation schemes has been one of the pillars of the regulatory reforms in the financial sector. The goal of our project is to establish empirically the link between loan officer incentives and loan default rates. How should incentives and the loan granting process be designed to minimize risks? Based on a novel and proprietary dataset by a major private bank, we want to examine the following three research questions: 1.) How do loan officers react to volume-based incentives when loan decisions are taken based on hard information only? In particular, to what extent are loan officers willing to manipulate even hard information if truthful reporting is incompatible with their personal incentives? 2.) How do loan officers react to a change in incentive structures from a system that rewards/punishes ex-post performance to a pure volume-based incentive system? 3.) If loan officers are volume-incentivized - as is the case at most banks worldwide - does the involvement of risk management in the loan granting process ("4-eyes-principle") lead to better decision making?

• DFG Programme: Research Grants
• International Connection: USA
• Participating Person: Professorin Manju Puri, Ph.D.
• Ehemaliger Antragsteller: Professor Dr. Tobias Berg, until 7/2016