Agency Meets Stability: The Effect of Corporate Governance and Capital Requirements on Bank Lending

58 Pages Posted: 31 Jan 2023

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: January 2023

Abstract

The conventional view is that capital requirements, those intended to reduce bank risks, can have a negative impact on bank lending. This paper reconsiders this view by studying the interaction between capital requirements and corporate governance. Our model highlights how capital requirements can have directionally different effects on lending, depending on the extent that management is protected against shareholder actions. Taking our model to the data, we find divergent lending practices for banks with stronger protections compared to their weaker counterparts. These results highlight the need for regulators to consider the impact of corporate governance when implementing bank capital requirements.

Keywords: Banking, capital requirements, stress testing, lending, corporate governance, managerial protections

JEL Classification: D24, G21, G32, G34, G38

Suggested Citation

Bosshardt, Joshua and Kakhbod, Ali and Sachdeva, Kunal, Agency Meets Stability: The Effect of Corporate Governance and Capital Requirements on Bank Lending (January 2023). Available at SSRN: https://ssrn.com/abstract=4342126 or http://dx.doi.org/10.2139/ssrn.4342126

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
124
Abstract Views
407
Rank
421,945
PlumX Metrics