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

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