The executive pay limits that came with the bank bailouts of the 2008-2009 financial crisis may have had the unintended benefit of reducing the bailouts' scope, a new study has found.
A report in the Journal of Banking, Finance and Accounting finds that the pay provisions discouraged some banks from participating in the Troubled Asset Relief Program, which ultimately paid out $400 billion of the $700 billion the government budgeted to shore up the U.S. financial system.
"We do know that some high-profile bankers complained that the pay restrictions were onerous. (But) our study suggests that TARP may have been better designed than bankers would have you believe," said Mary Ellen Carter, a Boston College professor of accounting and one of the study's authors. "The restrictions gave financial incentives for bank executives to think carefully about participating and, if they did participate, to get out from underneath the program as quickly as possible."
The researchers studied 263 publicly traded banks that were approved for TARP and found that 35 rejected the funds and that this decision was related to higher levels of CEO pay. However, these banks fared just as well as banks that took TARP money.
So the pay restrictions may have deterred banks that didn't really need the money from taking it, Carter said.
Banks that did take TARP funds saw higher executive turnover than their peers, she said, but the performance of those banks also didn't suffer.
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