This paper studies the agency problem between bank management, shareholders and the taxpayer. Executive bonuses increase in the probability the bank is
too-big-to-fail. Bank management recognise it is very likely optimal to select risky projects which exploit the taxpayer, implying project selection
effort (e.g. due diligence) is more expensive to incentivise. This agency problem leads to too much risk for society, not for shareholders.
Compensation rules aimed at solving management-shareholder agency problems — equity pay, deferred, including debt — do not correct the excessive risk
taking. By contrast, mauls and claw backs can incentivize the bank management to make better risk choices.
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