Working Paper: CEPR ID: DP7155
Authors: Gyngyi Lrnth; Alan D Morrison
Abstract: We examine the interdependency between loan officer compensation contracts and commercial bank internal reporting systems (IRSs). The optimal incentive contract for bank loan officers may require the bank headquarters to commit not to act on certain types of information. The headquarters can achieve this by running a basic reporting system that restricts information flow within the bank. We show that origination fees for loan officers emerge naturally as part of the optimal contract in our set-up. We examine the likely effect of the new Basel Accord upon IRS choice, loan officer compensation, and bank investment strategies. We argue that the new Accord reduces the value of commitment, and hence that it may reduce the number of marginal projects financed by banks.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Internal Reporting System (IRS) (H20) | Loan Officer Compensation (M12) |
| New Basel Accord (G18) | Value of Commitment (D46) |
| Value of Commitment (D46) | Number of Marginal Projects Financed (G39) |
| Internal Reporting System (IRS) (H20) | Distinction Between Positive and Negative NPV Projects (H43) |
| Advanced Internal Reporting System (IRS) (H20) | Informed Decisions About Project Types (H43) |
| Risk-sensitive Capital Requirements under Basel II (G28) | Reduction in Marginal Investments (G31) |