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.
SAFE Working Paper No. 316
