The Effect of TARP on Bank Risk-Taking

Abstract

ABSTRACT:One of the largest responses of the U.S. government to the recent financial crisis was the Troubled Asset Relief Program (TARP). TARP was originally intended to stabilize the financial sector through the increased capitalization of banks. However, recipients of TARP funds were then encouraged to make additional loans despite increased borrower risk. In this paper, we consider the effect of the TARP capital injections on bank risktaking by analyzing the risk ratings of banks' commercial loan originations during the crisis. The results indicate that, relative to non-TARP banks, the risk of loan originations increased at large TARP banks but decreased at small TARP banks. Interest spreads and loan levels also moved in different directions for large and small banks. For large banks, the increase in risk-taking without an increase in lending is suggestive of moral hazard due to government ownership. These results may also be due to the conflicting goals of the TARP program for bank capitalization and bank lending.

Understanding the accumulation of bank and thrift reserves during the U.S. financial crisis

“…In addition, the results noted in the previous section may reflect an environment with insufficient low-risk lending opportunities. The fact that banks receiving CPP funds in this environment accumulated less cash suggests that the CPP injection possibly resulted in more risk-taking in the form of new lending and less precautionary accumulation; see Black and Hazelwood (2013) for a formal analysis of this conjecture. Our results are suggestive regarding lending, but we cannot draw formal inference based on them.…”

“…To the best of our knowledge, this is the first study to adopt PSM in the non-experimental setting of applied banking. Similarly, Black and Hazelwood (2013) study bank risk-taking after receipt of CPP funds, using an event-study methodology that also carefully controls for differences between CPP and non-CPP recipients.…”

Risk Taking and Low Longer-Term Interest Rates: Evidence from the U.S. Syndicated Loan Market

“…A related literature studies the effect of more specific policy interventions, like the Troubled Asset Relief Program. See, for instance, Black and Hazelwood (2013), Duchin and Sosyura (2012), and Li (2013).…”

Did Saving Wall Street Really Save Main Street? The Real Effects of TARP on Local Economic Conditions

“…Prior TARP research includes investigations of the effects on bank lending (Black and Hazelwood, 2013;Li, 2013;Puddu and Walchli, 2013;Duchin and Sosyura, 2014), bank risk-taking (Black and Hazelwood, 2013;Li, 2013;Duchin and Sosyura, 2014), bank competition (Berger and Roman, forthcoming; Koetter and Noth, forthcoming), traded banks' stock market valuations (Veronesi and 2 Zingales, 2010;Ng, Vasvari, and Wittenberg-Moerman, 2013;Harrisa, Huertab, and Ngob, 2013), traded relationship borrowers' stock market valuations (Liu, 2013;Norden, Roosenboom, and Wang, 2013), and loan contract terms to recipient banks' large customers (Berger, Makaew, and Roman, 2015).…”