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

Christian Mücke, Loriana Pelizzon, Vincenzo Pezone and Anjan Thakor

American Economic Journal: Economic Policy, 2024, vol. 16, issue 4, 415-62

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-codes: G21 G28 G32 G34 G35 G38 H81 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1257/pol.20230313

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