Remuneration Provisions, Internal Governance and Risk Taking in Small Cooperative Banks
Maria Gaia Soana, Giovanni Ferri

Abstract
The CRD-IV Directive introduced some variable remuneration provisions in order to try to mitigate danger of excessive risk taking behaviour in the financial sector. While such approach makes sense for profit maximizing banks, it could be faulty to tame risk exposures of small cooperative banks (SCBs). We test our contention via unique data freshly assembled by an ad-hoc survey on manager compensation, internal governance and bank risk taking in Europe before and after the introduction of CRD-IV. Our results show that changes in remuneration schemes caused by this Directive did not induce less risk taking in SCBs. Our evidence also demonstrates that the changes in internal governance derived from the CRD-IV remuneration rules are not clearly associated with risk exposure. This evidence support the legislative proposals by the European Parliament in 2018 amending the current CRD-IV provisions about small financial firms.

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