Digital Commons Network^™

Why Do Banks Fail Together? Evidence From Executive Compensation, Deniz Anginer, Jinjing Liu, Cindy A. Schipani, H. Nejat Seyhun

Fordham Journal of Corporate & Financial Law

Recent bank failures have elicited extensive interest about the causes, focusing on incompetence of bank executives, policymakers, bank regulators and supervisors and even uninsured depositors. Yet, before we can prescribe solutions to bank failures, we need to identify the correct causes of the underlying problems. We argue that the problem is not so much with incompetence of executives, depositors, or regulators per se, but rather with managerial incentives.

We provide both a conceptual basis as well as empirical evidence to show that bank executives have incentives to increase systemic risks in order to maximize the benefits of bank bailouts. Consequently, …