Bank capital, dividends and management compensation Hyun Song Shin* Bank for International Settlements 2017 Biennial IADI Research Conference Basel, 1 June 2017 * The views expressed here are mine, not necessarily those of the Bank for International Settlements. Equity as foundation for lending Annual changes in assets, equity and debt for a large European bank 1999–2015, in billions of euros Graph 3 300 y = 0.999x – 5.08 200 R2 = 0.999 100 0 –100 Debt (equity) change –200 –100 –50 0 50 100 150 200 250 300 350 400 Asset change Debt change Equity change Scatter plot showing how much of the change in assets is accounted for by changes in debt and equity, respectively. Annual changes in billions of euros are shown for large European bank (1999-2015). Sources: S&P Capital IQ; BIS calculations. 2 Bank capital as foundation for lending Equity foundation of the building Leverage height of the building 3 Sutyagin house 4 Sutyagin house 5 Sound banks lend more Some stylised facts on bank leverage1 Figure 1 Cost of funding Non-equity funding Lending y = 11.1 - 0.112x y = 2.46 + 0.0331x 6 2 y = 10.7 - 0.138x R = 0.12 21 21 R2 = 0.16 R2 = 0.14 5 14 14 4 7 7 3 0 0 2 Growth of non-equity funding Growth of lending Cost of non-equity funding 1 –7 –7 10 20 30 40 50 60 70 10 20 30 40 50 60 70 10 20 30 40 50 60 70 Total assets/Equity Total assets/Equity Total assets/Equity 1 The panels represent scatter plots between the average level of leverage for a group of 105 international banks and selected bank-specific indicators: average cost of funding, average growth rate of non-equity financing; average annual growth rate of lending. Sources: BankScope; authors’ calculations. Gambacorta and Shin (2016, JFI forthcoming) 6 Retained earnings and accumulated dividends for 90 euro area banks Total retained earnings and accumulated dividends of a group of 90 euro area banks In billions of euros Graph 1 Euro area (total) By country, in 2015 600 150 53 223 196 400 30 100 177 110 155 37 87 140 50 28 78 200 32 50 30 279 190 234 301 227 250 296 310 348 92 38 109 37 47 25 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 DE ES FR IT NL Other EA1 Retained earnings Cumulative dividends from 2007 DE = Germany; ES = Spain; FR = France; IT = Italy; NL = Netherlands; Other EA = Other euro area. 1 Austria, Belgium, Finland, Greece, Ireland and Portugal. Sources: S&P Capital IQ; BIS calculations. 7 Two questions to ponder Who is the principal in the principal-agent relationship? Who are the interested parties? 8 Stickiness of CEO compensation and dividends = ++ “stickiness” coefficient = + + 9 “Stickiness” coefficient of top executive compensation and dividends, 2004-2015 Total compensation1/Total equity Dividends/Total equity Notes: The bars show the estimated size of the autoregressive parameter for total compensation of the firm top executive and dividends as a share of firms’ total equity. 1 Total compensation of the firm top executive. 2 Banks are all depository and non-depository credit institutions, security and commodity brokers, dealers, exchanges, and services. 3 Other financial firms are insurance carriers, insurance agents, brokers and service, real estate, holdings and other investment offices. 4 Non-financial firms are firms in all sectors excluding banks and other financial firms. Source: BIS calculations based on data from S&P Capital IQ. Deininger, Gambacorta and Shin (in progress) 10 Stickiness of top executive compensation and dividends: normal times vs crisis period Total compensation1/Total equity Dividends/Total equity Notes: The bars show the estimated size of the autoregressive parameter for total compensation of the firm top executive and dividends as a share of firms’ total equity. 1 Total compensation of the firm top executive. 2 Banks are all depository and non-depository credit institutions, security and commodity brokers, dealers, exchanges, and services. 3 Other financial firms are insurance carriers, insurance agents, brokers and service, real estate, holdings and other investment offices. 4 Non-financial firms are firms in all sectors excluding banks and other financial firms. Source: BIS calculations based on data from S&P Capital IQ. Deininger, Gambacorta and Shin (in progress) 12 Total CEO compensation and debt growth¹ Banks2 Other financial firms3 Non-financial firms4 Notes: ***, ** and * denote significance at the 1, 5 and 10 percent levels, respectively. 1 Total compensation of the firm top executive. 2 Banks are all depository and non-depository credit institutions, security and commodity brokers, dealers, exchanges, and services. 3 Other financial firms are insurance carriers, insurance agents, brokers and service, real estate, holdings and other investment offices. 4 Non-financial firms are firms in all sectors excluding banks and other financial firms. Source: BIS calculations based on data from S&P Capital IQ. Deininger, Gambacorta and Shin (in progress) 13 Dividends and debt growth Banks1 Other financial firms2 Non-financial firms3 Notes: ***, ** and * denote significance at the 1, 5 and 10 percent levels, respectively. 1 Banks are all depository and non-depository credit institutions, security and commodity brokers, dealers, exchanges, and services. 2 Other financial firms are insurance carriers, insurance agents, brokers and service, real estate, holdings and other investment offices. 3 Non-financial firms are firms in all sectors excluding banks and other financial firms. Source: BIS calculations based on data from S&P Capital IQ. Deininger, Gambacorta and Shin (in progress) 14 The elasticity of total compensation to total equity Elasticity of total compensation1 to total equity Notes: The graph shows the elasticity of total compensation to total equity for average values of firms’ total equity. The parameter estimates are based on a non-linear model specification controlling for firm-specific characteristics. 1 Total compensation of the firm top executive. 2 Banks are all depository and non-depository credit institutions, security and commodity brokers, dealers, exchanges, and services. 3 Other financial firms are insurance carriers, insurance agents, brokers and service, real estate, holdings and other investment offices. 4 Non-financial firms are firms in all sectors excluding banks and other financial firms. Source: BIS calculations based on data from S&P Capital IQ. Deininger, Gambacorta and Shin (in progress) 15 Reaction of total compensation and dividends to a 1% drop in real GDP growth Banks1: Total compensation2 Banks1: Dividends Non-financial firms3: Total compensation2 Non-financial firms3: Dividends Notes: The graphs show impulse responses (y-axis) from a 1 percent drop in real GDP growth after time t (x-axis) on top executives’ total compensation and firms’ dividends in banks and non-financial companies. The grey shaded areas illustrate 90 percent confidence bounds based on 1,500 Monte-Carlo simulations. 1 Banks are all depository and non-depository credit institutions, security and commodity brokers, dealers, exchanges, and services. 2 Total compensation of the firm top executive. 3 Non-financial firms are firms in all sectors excluding banks and other financial firms. Source: BIS calculations based on data from S&P Capital IQ. 16 Two concluding questions Who is the principal in the principal-agent relationship? What motivates the stakeholders? 16 Sample of the 90 euro area banks for Graph 1 Abanca Corporación Bancaria S.A., ABN AMRO Group N.V., Allied Irish Banks p.l.c., Alpha Bank A.E., Banca IMI S.p.A., Banca Monte dei Paschi di Siena S.p.A., Banca Nazionale del Lavoro SpA, Banca popolare dell'Emilia Romagna Società cooperativa, Banco Bilbao Vizcaya Argentaria S.A., Banco Comercial Português S.A., Banco de Sabadell S.A., Banco Popolare Societa Cooperativa Scarl, Banco Popular Espanol S.A., Banco Santander S.A., Bankia S.A., Bankinter S.A., Banque Fédérative du Crédit Mutuel S.A., Bausparkasse Schwäbisch Hall AG, Bayerische Landesbank, Belfius Banque SA/NV, BNP Paribas Fortis SA/NV, BNP Paribas Personal Finance SA, BNP Paribas SA, BNP Paribas Securities Services S.C.A., BRED Banque Populaire S.A., Caisse des dépôts et consignations, Caisse Française de Financement Local SA, CaixaBank S.A., Cassa di Risparmio di Parma e Piacenza S.p.A., Catalunya Banc S.A., Commerzbank AG, Confédération Nationale du Crédit Mutuel, Coöperatieve Rabobank U.A., Crédit Agricole Corporate and Investment Bank S.A., Credit Agricole S.A., Crédit du Nord Société Anonyme, Crédit Foncier de France, Crédit Industriel et Commercial, Crédit Mutuel Arkéa, Dekabank Deutsche Girozentrale, Deutsche Bank AG, Deutsche Boerse AG, Deutsche Kreditbank AG, Deutsche Pfandbriefbank AG, Deutsche Postbank AG, Dexia Crédit Local Société Anonyme, Dexia SA, DZ Bank AG, Erste Group Bank AG, Eurobank Ergasias S.A., HSBC France S.A., HSH Nordbank AG, Hypo Real Estate Holding AG, Hypothekenbank Frankfurt Aktiengesellschaft, Ibercaja Banco S.A., Iccrea Holding S.p.A., ING Bank N.V., ING Belgium SA/NV, ING-DiBa AG, Instituto de Crédito Oficial, Intesa Sanpaolo S.p.A., KfW, Kutxabank S.A., Landesbank Baden-Württemberg, Landesbank Berlin AG, Landesbank Hessen-Thüringen Girozentrale, Landeskreditbank Baden-Württemberg - Förderbank, Landwirtschaftliche Rentenbank, LCL, Mediobanca Banca di Credito Finanziario S.p.A., N.V. Bank Nederlandse Gemeenten, National Bank of Greece S.A., Natixis, Nederlandse Waterschapsbank N.V., Norddeutsche Landesbank Girozentrale, NRW.BANK, Piraeus Bank S.A., Pohjola Bank plc, Raiffeisen Bank International AG, Raiffeisen Zentralbank Österreich Aktiengesellschaft, Santander Consumer Finance S.A., SNS Bank N.V., Societe Generale Group, The Governor and Company of the Bank of Ireland, UniCredit Bank AG, UniCredit Bank Austria AG, UniCredit S.p.A., Unione di Banche Italiane S.p.A., WGZ BANK AG Westdeutsche Genossenschafts-Zentralbank, Wüstenrot & Württembergische AG. 17.