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 It finds that larger delta, assets delta, asset vega increase probability of closure

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.

Comment 1a Lower fraction High powered incentives Larger fraction Higher powered incentives ClosureEnforcement No action / Informal intervention 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?

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

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?

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?

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?

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