Bankers’ Outside Options and Financial Risk

Valentin Kecht () and Georg Schneider ()
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Valentin Kecht: University of Bonn
Georg Schneider: University of Bonn

No 429, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: Firms can discipline workers through the threat of termination, but the value of continued employment depends on job opportunities in the external labor market. We study how bankers’ outside options affect risky lending. Using granular employment histories and predetermined coworker links, we construct a time-varying bank-level measure of outside options from hiring at connected financial institutions. A standard-deviation improvement in outside options raises non-investment-grade lending growth by 1.6 to 3.0 percentage points and shifts loans toward borrowers with greater ex-ante and realized risk without detectable compensating loan spreads. Measures of bank and systemic risk also increase. Among individually matched bankers, outside options increase borrower risk and weaken the separation penalty following poor loan performance. The risk response is concentrated among younger bankers, who are more mobile. Financial advisors exhibit a similar pattern of increased misconduct followed by weaker employment penalties under improved outside options. The evidence indicates that workplace discipline is dependent on external labor market conditions, transmitting labor market fluctuations into credit risk.

Keywords: Financial Stability; Risk; Labor Markets; Outside Options (search for similar items in EconPapers)
JEL-codes: D82 G01 G21 G24 J62 (search for similar items in EconPapers)
Pages: 87 pages
Date: 2026-09
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Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:429

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