We empirically examine the Capital Purchase Program (CPP) used by the U.S. 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.
American Economic Journal: Economic Policy, Vol. 16, No. 4, pp. 415-462,
2024