Inside Debt and Bank Performance During the Financial Crisis



This paper examines how holdings of defined benefit pensions and deferred compensation (inside debt) influence bank performance during the recent financial crisis. Using a proprietary sample of executives from 319 small and large U.S. banks, I find that banks with larger end-of-2006 inside debt holdings generate higher returns, display a smaller increase in downside risk, and have a smaller probability of distress from July 2007 to March 2009. Inside debt is also positively associated with conservative balance sheet management pre-crisis, and a better-quality asset portfolio in December 2008. The findings suggest that debtholder governance moderates bank risk-taking, with important implications for the stability and governance of financial institutions.
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Sebastian Gryglewicz
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