臺大管理論叢 NTU Management Review VOL.29 NO.1

CEO Incentives and Bank Liquidity Management 256 CEO Incentives and Bank Liquidity Management The Basel-based Bank for International Settlements, often called the central bankers' central bank, will also assess findings of a report published last month by the Senior Supervisors Group, made up of regulators from France, Germany, Switzerland, the U.K. and the U.S., showing that banks hit hardest by the market turmoil had less understanding and control over their balance sheets and liquidity needs. ~ Adam Bradbery, Wall Street Journal, New York, N.Y., Apr. 12, 2008. 1. Introduction Many recent analyses have shown that malfunctions in the banking system were a major cause of the U.S. subprime mortgage crisis in 2007 and the subsequent global financial crisis in late 2010 (Fahlenbrach and Stulz, 2011; Loutskina, 2011). As the quoted news report indicates, underestimation and ignorance of bank liquidity (i.e., the amount of cash or near cash assets a bank has; the more liquid assets a bank has, the higher the bank’s liquidity) needs were major causes of bank failures. Commercial banks act as financial intermediaries through the disbursement of cash to depositors (who withdraw from their accounts) and provision of loans to borrowers. This “transformation” service creates liquidity that funds demand, but it also creates liquidity risk for banks that have unbalanced cash flows from assets and liabilities (Barth and Bennett, 1975; Gatev, Schuermann, and Strahan, 2007; Rose and Hudgins, 2012). The literature has shown that liquidity risk can cause serious financial problems for banks when they are unable to pay short term obligations that are due (Diamond and Dybvig, 1983). However, the average ratio of U.S. commercial banks’ total assets held as liquid securities decreased by 7.33 percent between 1976 and 2007 (Loutskina, 2011). Acharya and Naqvi (2012) suggested that bank liquidity management be one of the key causes of financial crises. Fahlenbrach and Stulz (2011) found that banks with higher CEO incentives took higher risks before financial crises and then performed worse in crises. Their study indicated that the alignment of CEO incentives with shareholders’ interests plays an important role in bank performance. Studies have shown that the level of transaction deposits, unused loan commitments (Kashyap, Rajan, and Stein, 2002; Gatev et al., 2007), securitization (Loutskina, 2011), and bank capital (Berger and Bouwman, 2009) are important factors of bank liquidity; however, no study to date has considered how managerial incentives determine a bank’s liquidity policy. This study attempts to fill this gap. We hypothesize that CEOs with higher incentives to maximize shareholder