Essays on Commercial Bank Risk, Regulation and Governance

In the first chapter, I analyze the effect of various risks faced by commercial banks on the executive compensation in banking industry. Executives in any industry are, on average, risk averse if their compensation is not tied to the long term performance of the firm. Commercial bank executives are more risk averse due to the regulatory pressure in addition to board governance mechanism. Commercial banks face various risks because of the regulatory mechanism and unique asset structure of the firm. Because commercial bank executives are riskaverse, it is expected that they should associate their own pay and pay-performance sensitivities (PPS) with the risks their banks face.;I use a dataset of 149 commercial banks and compensation of 1,248 executives. The results show that bank executives associate their performance based pay with both idiosyncratic risk and systematic risk. But they associate their fixed pay only with systematic risk. The risk based PPS is also affected by the idiosyncratic risk but not by the systematic risk. Both asset return risk and insolvency risk have significant positive effect on PPS. Executives also associate their performance based pay with asset return risk because the asset structure of banks is different and proper management of such assets is also a performance measure for these executives. All these results imply that the risk-averse nature of bank executives as they demand premium compensation for the exposure to different risks faced by the firm.;In the second chapter, I analyze the regulatory effect on the governance mechanism in banking industry in addition to the board governance mechanism. Using a sample of 37,354 executives including both CEOs and other executives from banking and all other industries I find that the bank executives put significantly higher emphasis on the fixed compensation in terms of salary and bonus, and significantly lower emphasis on the performance based compensation. Bank executives also put minimum emphasis on the risk based PPS although they put significant emphasis on return based PPS. Also bank executives put higher emphasis on performance based pay and lower emphasis on fixed pay as such regulatory binding relaxes over time. This again indicates the risk-averse nature of the bank executives due to the regulatory pressure in addition to board governance mechanism.