Georg Schneider

This paper documents that bankers with better labor market outside options take more financial risk. We use granular employment history data to construct a bank-level measure of outside options that captures labor demand shocks at connected financial institutions. Banks with workers exposed to improved outside options expand lending volumes by shifting toward riskier borrowers, raising financial risk at both the bank and system level. These patterns are not driven by yield-seeking or demand-side factors, and are instead consistent with a framework in which outside options insure bankers against adverse outcomes, weakening the disciplinary role of dismissal risk. We provide evidence for this mechanism using individual-level data on bankers’ lending decisions and information on financial advisor misconduct. As outside options are procyclical, our results point to a labor mobility channel through which labor market conditions contribute to aggregate fluctuations in credit supply.