Is Cyprus the Warning Bell that Bank Deposits are No Longer Safe? Graziadio Business Review, 18(2). (2015).
Cyprus may have been the warning bell that bank deposits in Europe and the United States are no longer safe. Changes in the U.S. bankruptcy code, along with the Dodd-Frank law have left U.S. deposits at risk in a new way.
Examining Bank Employee Compensation and Residential Mortgage Loan Volume at the State Level. International Journal of Business, Accounting, and Finance, 4(1), 18-32. (2010).
This study examines the impact of mortgage loan volume on bank employees’ total compensation at the state level. If banks had a stronger incentive to generate mortgage volume at the expense of credit quality in some state than others, and banks in these states responded by encouraging their employees to generate loan volume through employee compensation, then states with higher default rates will also have a stronger relationship between mortgage loan volume and employee compensation. This study finds that employees’ total compensation is positively related to mortgage loan volume. Examining across different states, this study finds that four states with the highest mortgage defaults, California, Nevada, Arizona, and Florida, have a higher sensitivity of total employee pay to mortgage loan volume, suggesting that employees were motivated to focus on volume rather than loan quality. More importantly, this study finds an increasing sensitivity of pay to mortgage volume that coincides with the housing market bubble period.
The Impact of Mortgage Loans Transferred on Bank Employee Compensation. Global Business & Finance Review, 14(1), 77-85. (2009).
This paper compares how employees are compensated when they originate loans that are held by the bank versus loans that are sold. Banks may be less concerned about the credit quality of a borrower when they sell the loan to an outsider. This study looks at mortgages transferred out of banks where partial recourse is transferred. First, it finds that loans transferred out of banks into Government Sponsored Enterprises (FNMA and FHLMC) and private entities increase employee compensation by 6 cents per dollar of loans transferred. Compared to the 3.5 cent increase in employee compensation per dollar of mortgage loans underwritten and held by the bank, this impact of mortgage loan transfers on compensation is about 71% higher. Thus, employees receive a stronger incentive to focus on loan volume and potentially focus less on credit quality, for those loans where liability for loss is being partially transferred away from the bank. This suggests that banks should review their compensation practices, and be prepared to communicate to regulators and investors who purchase loans about these practices. Regulators and investors may need to pay closer attention to the compensation policies of banks, and may even consider creating policies regarding the compensation of employees who originate not only mortgages, but any kind of loan that is being sold and securitized, or where recourse is being transferred.