Lending in Crisis: How CEO Incentives Shape Outcomes
Video Summary
In a crisis, bank leadership becomes policy in disguise. This piece shows how personal timelines, not just public rules shape who gets credit and who doesn’t. Looking at India’s 2008 loan-restructuring window, ISB Professor Prasanna Tantri tracks how CEOs reacted when regulators made it easier to roll over troubled loans. A clear split emerges: leaders nearing retirement were far more likely to keep weak firms alive by restructuring bad loans, delaying losses and dressing up the books. Newly appointed CEOs, with the fallout set to land on their watch, cut exposure sooner and faced the pain early. The study observes 27 government-controlled banks during the window (with 11 CEO changes) and applies a difference-in-differences design that leverages age-based CEO retirement to isolate incentives, matched to a large firm–bank dataset (18,000+ firms). The pattern is consistent: when incentives go unchecked, zombie lending rises; when fresh leadership draws the line, balance sheets clean up and post-crisis investment is stronger.
The lesson is simple and uncomfortable: flexible rules without aligned incentives misallocate capital and slow recovery. The fix is equally clear: reward timely recognition, not optical calm and design forbearance with guardrails so leadership incentives point the economy toward productive growth.
Authored by ISB Editorial