The Carrot and the Stick: Bank Bailouts and the Disciplining Role of Board Appointments
82 Pages Posted: 8 Jul 2021 Last revised: 8 Nov 2023
Date Written: November 1, 2023
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 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 Treasury were associated with improved bank performance and lower CEO pay.
Keywords: Bank Bailout, TARP, Capital Purchase Program, Dividend Payments, Board Appointments, Bank Recapitalization
JEL Classification: G01, G2, G28, G38, H81
Suggested Citation: Suggested Citation