Mücke, Christian Pelizzon, Loriana Pezone, Vincenzo Thakor, Anjan V.
Year of Publication:
SAFE Working Paper No. 316
We empirically examine the Capital Purchase Program (CPP) used by the US gov- ernment to bail out distressed banks with equity infusions during the Great Recession. We find strong evidence that a feature of the CPP - the government's ability to ap- point independent directors on the board of an assisted bank that missed six dividend payments to the Treasury - helped attenuate bailout-related moral hazard. Banks were averse to these appointments - the empirical distribution of missed payments exhibits a sharp discontinuity at five. Director appointments by the Treasury led to improved bank performance, lower CEO pay, and higher stock market valuations.
Bank Bailout TARP Capital Purchase Program Dividend Payments Board Appointments Bank Recapitalization