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.
The Outreach and Education function engages, empowers and educates the Second District communities that the Bank serves, especially civic leaders, students, educators, small business owners, policymakers and the general public. It furthers the Bank's commitment to the region by listening to the communities we serve and leveraging our unique attributes to positively impact school and university programs, as well as analysis and research.
This paper studies the connection between risk taking and executive compensation in financial institutions. A theoretical model of shareholders, debtholders, depositors, and an executive demonstrates that 1) excessive risk taking (in the form of risk shifting) can be addressed by basing compensation on both stock price and the price of debt (proxied by the credit default swap spread), 2) shareholders may not be able to commit to designing compensation contracts in this way, and 3) they may not want to because of distortions introduced by either deposit insurance or trusting debtholders. The paper also provides an empirical analysis that suggests that debt-like compensation for executives is believed by the market to reduce risk for financial institutions.