Debt Incentives and Bank Risk-Taking

We examine how executive pension and deferred compensation plans affect bank risk-taking. We show that banks with more inside debt incentives are 5-6% less likely to approve risky mortgages. Using state individual tax rates as instruments, we show that the effect is likely to be causal. Further evidence shows that the effect comes mainly from executive pension plans. This result is robust and statistically significant after controlling for other potential reasons affecting mortgage origination and various fixed effects.