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Michiel Bijlsma CPB Netherlands Bureau for Economic Policy Analysis

Michiel Bijlsma CPB Netherlands Bureau for Economic Policy Analysis. Summary. Paper relates pre-crisis compensation measures (delta, vega, assets delta, asset vega) to observed post-crisis regulatory intervention enforcement action and closure

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Michiel Bijlsma CPB Netherlands Bureau for Economic Policy Analysis

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  1. Michiel BijlsmaCPB Netherlands Bureau for Economic Policy Analysis

  2. Summary • Paper relates pre-crisis compensation measures (delta, vega, assets delta, asset vega) to observed post-crisis regulatory intervention enforcement action and closure • It finds that larger delta, assets delta, asset vega increase probability of closure

  3. What I like about the paper • Realized enforcement actions include consequences of taking unobserved or unregulated risk • Looking at asset delta or asset vega really looks at the option value inherent in limited liability of shareholders.

  4. Comment 1a • Table 4: compared to no intervention • all compensation variables are higher in closed banks • all compensation variables are lower in for banks with enforcement action • What’s going on? Lower fraction High powered incentives Larger fraction Higher powered incentives Enforcement Closure No action / Informal intervention

  5. Comment 1a • Why not include decision of regulator in estimation? • Could you also not use ‘further intervention’ category? CEO decides on risk Possible further Intervention Regulator Observes bank characteristics decides on intervention Intervention Realized (formal or informal)

  6. Comment 1b • ‘Use multinomial logit model avoids sample selection problem’ • I’m not an econometrician, but • Multinomial model simply forces parameter to take a single value • How does this solve sample selection problem? • Why not use sample selection models?

  7. Comment 2 • High leverage implies a high sensitivity of value of shares to changes in asset value of the bank • Asset delta is strongly correlated with leverage • High leverage also implies high sensitivity to shocks such as a systemic banking crisis • Are you not measuring that leverage results in higher risk?

  8. Comment 3 • For small banks, regulators in the US use prompt corrective action • This means that enforcement actions are triggered when for example regulatory capital levels or leverage ratios cross certain pre-determined thresholds • To what extent is the variable ‘enforcement actions’ measuring whether thresholds are crossed?

  9. Comment 4 • Is the large amount of regressions in the tables really necessary? • What do the columns EA and Closure mean in the multinomial regression? • Discussion of the relevant literature seems relatively limited

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