Banks’ role in ﬁnancial intermediation and the provision of other specialized ﬁnancial services not only places them at the center of many important global ﬁnancial markets, but also ties their health to that of other ﬁnancial institutions, industrial ﬁrms, and consumers. The vast reach of banks’ activities was made apparent during the ﬁnancial crisis of 2007-2009, which also highlighted the acute need for a better understanding of whether, how, and the extent to which banks contribute to systemic risk in the economy (i.e., the risk that many ﬁnancial institutions fail together). Prior research into the sources of systemic risk largely focuses on the outcomes of banks’ risky activities (e.g., the composition of banks’ ﬁnancing or the correlation of banks’ asset returns). However, these and other risky activities are ultimately the result of bank managers’ decisions which, we argue, are shaped by their contractual incentives. Following this intuition, we study whether and how bank executives’ compensation contracts lead to the systemic risk of their institutions. READ MORE