The Link between Debt Guarantees, Leverage Ratios and Salaries in Swiss Banking (Research Square)

Summary

• Cantonal banks of Bern, Geneva and Vaud dropped their debt guarantees in 2000, 2008 and 2012 respectively.p.4
• The return on education varies from 4.9 to 7.7% across the five bank groups.p.9
• Compared with regional and savings banks, pay premiums are 4.26% for banks with explicit guarantees, 5.63% for cantonal banks of BE, GE and VD, and 9.86% for large banks.p.10
• Basel III leverage ratios run from 8.3% for banks with explicit guarantees to 5.3% for large banks, the latter with a pay premium of 9.86%.p.12
• The cantonal bank analysis covers 18 banks, which yield 306 possible pairwise comparisons, reduced to 34 using two reference banks.p.13
• A one percentage point increase in a bank's equity ratio would lower the average bank salary between 0.38 and 0.92%.p.18

Key insights

1. State bank debt guarantees are linked to a positive relationship between risk exposure and pay in Swiss banking.p.2
2. Banks are grouped by guarantee type: explicit guarantees, implicit guarantees for BE, GE and VD cantonal banks, implicit guarantees for large banks, no guarantees, and Raiffeisen banks.p.7
3. Raiffeisen banks, which are not known to be protected by debt guarantees, show a pay premium of -4.19%.p.10
4. Cantonal banks with explicit guarantees and the Raiffeisen Group exhibit the largest capital cushions and the lowest pay premiums.p.12
5. Excluding outlier banks, the correlation between leverage ratio and pay premium is -0.47 with a p-value of 0.05.p.16
6. No statistically significant linear relationship exists between pay premiums and equity across all cantonal banks.p.16
7. Explicit debt guarantees unexpectedly yield smaller pay premiums than implicit assurances.p.19