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The Carrot and the Stick: Bank Bailouts and the Disciplining Role of Board Appointments

Year: 2024

Type: article

Abstract: We empirically examine the Capital Purchase Program (CPP) used by the US government to bail out distressed banks and its implications for regulatory policy. We find strong evidence that a feature of the CPP—the government’s ability to appoint independent directors on the board of an assisted bank that missed six dividend payments to the Treasury—had a significant effect on bank behavior. Banks were averse to these appointments—the empirical distribution of missed payments exhibits a sharp discontinuity at five. Director appointments by the Treasury were associated with improved bank performance and lower CEO pay. (JEL G21, G28, G32, G34, G35, G38, H81)

Source: American Economic Journal Economic Policy

DOI: 10.1257/pol.20230313

Authors: Christian Mücke, Loriana Pelizzon, Vincenzo Pezone, Anjan Thakor

Institutions: ESCP Business School, Goethe University Frankfurt, Ca' Foscari University of Venice, Leibniz Institute for Financial Research SAFE, Tilburg University, Washington University in St. Louis

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: Peace, justice, and strong institutions, Decent work and economic growth

Open Access status: green

OpenAlex ID: W4403946830

FWCI: 1.08

Cites: 56

Cited by: 3

Related to: 10