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

CEO Incentives and Bank Liquidity Management 262 Based on the cited studies, we conjecture that a positive relation between bank capital and bank liquidity exists. Banks with higher levels of capital are better able to take risk and create more loan portfolios, and therefore require less liquidity reserves compared to banks holding lower levels of capital. 2.1.4 Business Cycle A related issue to bank capital is the business cycle. Banks tend to raise their capital buffers during economic upturns following the assumption that risks may increase during booms. Therefore, an increase in capital buffers should offset the negative effects of pro- cyclical requirements. However, some institutions fail to characterize the cyclical nature of output, so they underestimate actual risks, and therefore there exists a negative relationship between capital buffers and cyclical position. Ayuso, Pérez, and Saurina (2004) empirically tested this issue and found that there was a significant relation between stage of economic cycle and capital buffers for Spanish banks. Acharya, Shin, and Yorulmazer (2010) developed a theoretical model to address the relation between bank liquidity choices under different business status. They argued that banks may hold more liquid assets in business downturns because these assets can be used to acquire additional assets from distressed banks at fire-sale prices during economic crises. Surviving banks acquiring cheap assets stand to make substantial gains. Thus, banks tend to hold more liquid assets not only to ensure survival during crises but also to acquire additional assets at fire-sale prices. According to this argument, bank liquidity levels move counter to the business cycle, which fluctuates together with the demand for risky loans. 2.2 Do CEO Incentives Affect Bank Liquidity Holdings? Previous studies have documented several important factors that affect bank liquidity holdings, such as the synergy effect between demand deposits and unused loan commitments (Kashyap et al., 2002; Gatev et al., 2007), securitization (Loutskina, 2011), bank capital (Berger and Bouwman, 2009) and macroeconomic factors (Acharya et al., 2010). However, to the best of our knowledge, no study has investigated the role of CEO incentives in determining bank liquidity policy. Since The Bank for International Settlement argues that under-estimating or ignorance of liquidity is a major cause of severe losses during market turmoil (Bradbery, 2008), it is crucial to examine if bank liquidity policy is associated with managerial incentives, resulting in the changing of bank policies and performance.