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

49 Pages Posted: 1 Jan 2020 Last revised: 17 Apr 2020

See all articles by Joshua Bosshardt

Joshua Bosshardt

Massachusetts Institute of Technology (MIT)

Ali Kakhbod

Massachusetts Institute of Technology (MIT) - Department of Economics

Date Written: December 1, 2019

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

Suggested Citation

Bosshardt, Joshua and Kakhbod, Ali, Managerial Protections and Bank Lending: Evidence from U.S. Post-crisis Stress-testing (December 1, 2019). Available at SSRN: https://ssrn.com/abstract=3499164 or http://dx.doi.org/10.2139/ssrn.3499164

Joshua Bosshardt

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Ali Kakhbod (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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