The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
Regional & Community Outreach connects the Bank to Main Street via structured dialogues and two-way conversations on small business, mortgages, and household credit.
Economic Education improves public knowledge about the Federal Reserve System, monetary policy implementation, and promoting financial stability through the Museum and programs for K-16 students and educators, and the community.
In this paper, we assess the effects of CEO stock options on three key corporate policies for banks: investment choice, amount of borrowing, and level of capital. Using a sample of 549 bank-years for publicly traded banks from 1992 to 2002, we find that stock option grants lead CEOs to undertake riskier investments. In particular, higher levels of option grants are associated with higher levels of equity and asset volatility. Consistent with the role of options as a nondebt tax shield, we also show that option grants reduce the banks’ incentive to borrow as evidenced by lower levels of interest expense and federal funds borrowing. Furthermore, we demonstrate that increases in CEO and employee stock option grants result in increased bank capital levels, perhaps because option grants create a contingent liability for the firm that needs to be funded in advance.