Managerial Protections and Bank Lending: Evidence from U.S. Post-crisis Stress-testing

Abstract

We introduce a model to argue that managerial protections can qualitatively influence the effect of capital requirements on bank lending. Capital requirements undermine the role of debt in disciplining managers from pursuing unprofitable projects. We show that increasing the level of investment can serve as a partial substitute for debt in disciplining managers. Consistent with this result, we show that bank stress testing after the 2008 financial crisis led to a relative increase in lending for banks with strong managerial protections compared to banks with weak protections.

Keywords: Managerial protections, Stress testing, Capital structure, Ownership structure, Investment, Banking

JEL Classification: D24, G32