The Role of Managerial Protections on Bank Capital Requirements

55 Pages Posted: 1 Jan 2020 Last revised: 8 Apr 2022

See all articles by Joshua Bosshardt

Joshua Bosshardt

Federal Housing Finance Agency

Ali Kakhbod

University of California, Berkeley

Kunal Sachdeva

Rice University - Jesse H. Jones Graduate School of Business

Date Written: November 1, 2021

Abstract

Can tightening capital requirements lead to greater lending? We introduce a model to illustrate how the effect of capital requirements on bank lending can qualitatively depend on the extent of managerial protections against shareholder actions. Protections encourage managers to pursue unprofitable projects. While managers can still be disciplined by debt, if a financial institution’s debt is constrained by capital requirements, then a higher level of investment can serve as a partial substitute. Capital requirements can therefore spur increased investment for banks with managerial protections. Empirically, we study banks facing stress-tests following the great recession and find evidence consistent with our model, that there was an increase in lending for banks with strong protections compared to banks with weak protections. These results provide new insights into the central role that corporate governance and incentives of bank managers have on the effect of bank capital requirements.

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

JEL Classification: D24, G32

Suggested Citation

Bosshardt, Joshua and Kakhbod, Ali and Sachdeva, Kunal, The Role of Managerial Protections on Bank Capital Requirements (November 1, 2021). Available at SSRN: https://ssrn.com/abstract=3499164 or http://dx.doi.org/10.2139/ssrn.3499164

Joshua Bosshardt

Federal Housing Finance Agency ( email )

400 7th Street SW
Washington, DC 20552
United States

Ali Kakhbod (Contact Author)

University of California, Berkeley ( email )

Haas School of Business
2220 Piedmont Ave
Berkeley, CA 94720
United States

Kunal Sachdeva

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

HOME PAGE: http://kunalsachdeva.com

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