WANG Yanyan;WANG Chenglong;YU Lisheng;ZHENG Tianyu
School of Management, Xiamen University;Shenzhen Rural Commercial Bank;School of Management, Xiamen University;School of Management, Xiamen University
After the 2008 financial crisis, shadow banking has attracted great attention from financial regulators all around the world. As a credit intermediary system beyond the formal system, shadow banking alleviates financial supervision and causes high systemic risks. Therefore, shadow banking governance has become the top priority of China to maintain financial stability. Against the background of deferred compensation in China’s commercial banking industry, this paper explored whether the implementation of deferred compensation can guide commercial banks to reduce the scale of high-risk shadow banking business. On the one hand, according to the agency theory, deferred compensation is different from other compensation arrangements. It not only coordinates the conflict of interest between shareholders and agents, but also allows bank executives to assume the role of creditor through deferred compensation arrangements. It also helps to alleviate the agency problem between bank executives and creditors, reduce the risk-taking motives of bank executives, and thus reduce the shadow banking business that hides huge risks. On the other hand, although the risk monitoring indicators specified in the Guidelines on Sound Compensation Supervision for Commercial Banks (hereinafter referred to as Guidelines) can effectively monitor the risks of traditional credit business, it is difficult to determine the risks of shadow banking, which provides opportunities of regulatory arbitrage from less regulated shadow banking for banks according to the theory of regulatory arbitrage. Using the sample of Chinese banks from 2007 to 2018 and the promulgation of the Guidelines released in 2010 as a quasi-natural experiment, this paper explored the causal relationship between deferred compensation and the scale of shadow banking in commercial banks. The results of the paper are as follows. (1) The scale of shadow banking has increased significantly after the implementation of the deferred compensation. The deferred compensation has a counter-productive consequence. The deferred compensation arrangement has not restricted the high-risk shadow banking business, but promoted its growth. This conclusion is still valid after a series of robustness tests. (2) After the implementation of the deferred compensation, the banks seem to actively reduce loans to high-risk industries (such as real estate), and improve the on-balance sheet risk evaluation indicators, but in fact, the high-risk loan business was transferred to off-balance sheet shadow banks to avoid supervision and risk assessment. The contributions of this paper are as follows. First, this paper not only theoretically enriches the research on debt incentives, but also provides evidence for the supervisors to deepen and improve their understanding of deferred compensation policies. Since Jensen and Meckling (1976) put forward the agency theory, debt incentives have been regarded as a weapon to safeguard the interests of creditors and reduce management risk. The subsequent theoretical and empirical studies have also mostly confirmed the positive role of deferred compensation payment in corporate risk prevention. However, this paper finds that the deferred compensation may have a negative effect. Secondly, this paper enriches banks’ risk management and shadow banking supervision research from the perspective of executive compensation. After the financial crisis, shadow banking supervision has become the focus of the supervision of financial institutions in various countries and one of the focus topics of academic research. The evidence in this paper shows that under China’s financial system, the debt incentive reform of deferred compensation has a certain risk suppression effect, but it is not an effective mechanism to curb the shadow banking problem.
deferred compensation;shadow banking;financial stability
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