The effect of TARP on bank risk-taking

Black, Lamont K.; Hazelwood, Lieu N.

doi:10.1016/j.jfs.2012.04.001

Cited by 217 publications

(114 citation statements)

References 30 publications

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“…Forssbaeck (2011) also explores the importance of deposit insurance and ownership on bank risk-taking but his work differs from ours along several dimensions. For instance, his paper focuses on the period from 1995 to 2005, and in contrast to our findings, 3 In related work, other authors have found a positive effect of actual government support on bank risk-taking (see Black and Hazelwood, 2012, for the effect of TARP on U.S. banks and Duchin and Sosyura (2011) for a broader sample of U.S.publicly traded financial firms). We instead focus on expected, not actually received, government support and use a sample of banks from many countries.…”

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confidence: 95%

International Evidence on Government Support and Risk Taking in the Banking Sector

Brandão-Marques

Correa²,

Sapriza³

2013

IMF Working Papers

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Government support to banks through the provision of explicit or implicit guarantees can affect the willingness of banks to take on risk by reducing market discipline or by increasing charter value. We use an international sample of bank data and government support to banks for the periods 2003-2004 and 2009-2010. We find that more government support is associated with more risk-taking by banks, especially during the financial crisis (2009-10), even after controlling for several bank-specific and country-level factors. We use several measures of government support and bank risk-taking, and the results are robust to various possible misspecification issues. We also find that restricting banks' range of activities ameliorates the moral hazard problem. We propose that policy measures to counteract this moral hazard problem should be geared towards strengthening market discipline in the banking sector.JEL classifications: G21, G28, H81

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contrasting

confidence: 95%

International Evidence on Government Support and Risk Taking in the Banking Sector

Brandão-Marques

Correa²,

Sapriza³

2013

IMF Working Papers

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“…Bagehot (1873) already noted the moral hazard e ect and excessive risk-taking induced by banks' expectation for bailout (instead of resolution). Although various rationales for bailout policies can be formulated (Acharya and Yorulmazer, 2007;Diamond and Dybvig, 1983;Diamond and Rajan, 2005), several recent studies provide empirical evidence regarding the moral hazard e ect of bailout (expectations) on risk-taking (e.g., Black and Hazelwood, 2013;Dam and Koetter, 2012;Duchin and Sosyura, 2013). Conversely, when bailout guarantees cease to be implicit through a credible and enforceable improvement in bank resolution regimes, we expect banks to change their behavior towards less risk-taking.…”

Section: )mentioning

confidence: 95%

“…Our paper contributes to the recent literature on the e ects of regulatory actions on bank behavior, particularly risk-taking (e.g., Berger et al, 2012;Black and Hazelwood, 2013;Dam and Koetter, 2012;Duchin and Sosyura, 2013). Whereas these papers focus primarily on the e ects of government bailout policies, we investigate the e ects of an ex ante disciplining regulatory approach.…”

Section: )mentioning

confidence: 98%

“…6 Black and Hazelwood (2013)and Duchin and Sosyura (2013) provide evidence that (at least large) TARP-funded U.S. banks increased risk-taking after the capital injection. Dam and Koetter (2012) exploit a dataset on capital injections in Germany and nd that bailout expectations (through observed capital injections) increase risk-taking in the entire banking sector (measured as the probability of default).…”

Section: Related Literature and Key Hypothesesmentioning

confidence: 99%

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Wishful thinking or effective threat? Tightening bank resolution regimes and bank risk-taking

Ignatowski

Korte

2014

Journal of Financial Stability

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe propose a framework for testing the e ects of changes in bank resolution regimes on bank behavior. By exploiting the di erential relevance of recent changes in U.S. bank resolution (i.e., the introduction of the Orderly Liquidation Authority, OLA) for di erent types of banks, we are able to simulate a quasi-natural experiment using a di erence-in-di erence framework. We nd that banks that are more a ected by the introduction of the OLA (1) signi cantly decrease their overall risk-taking and (2) shift their business model and loan origination towards lower risk, indicating the general e ectiveness of the regime change. This e ect, however, does (3) not hold for the largest and most systemically important banks. Hence, the introduction of the OLA in the U.S. alone does not appear to have solved the too-big-to-fail problem and might need to be complemented with other measures to limit nancial institutions' risk-taking. Non-technical summary Bank regulators and legislators have discussed and brought into force signi cant changes to bank resolution regimes in an e ort to prevent future crises. However, can this really induce more prudent bank behavior? Economic theory indeed suggests that credible improvements in resolution regimes can increase overall bank discipline. When bank regulators, i.e., the authorities competent for resolution decisions, do not have access to a special bank resolution regime and appropriate resolution funds, they might incur large liquidity costs -such as temporary disruptions in lending that would add downward risks to the real economy -if they have to resolve a failed bank. Despite the long run bene ts of discipline, competent authorities might hence prefer bailouts or forbearance over straightforward resolution. Improvements in resolution regimes, however, that (a) legally empower the authorities to execute bank resolution faster and more e ciently while preserving more liquidity, and (b) endow the authorities with su cient nancial resources to resolve banks, make resolution a more likely choice. Consequently, to the extent that an improvement in bank resolution regimes is credible and enforceable, implicit bailout guarantees might cease, and banks might change their behavior towards less risk-taking.Building on this theoretical background, we de ne our hypothesis that banks a ected by a tightening in resolution regimes alter their behavior towards less risk-taking and safer busi...

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“…While the eects of various bailout mechanisms and accommodative policies, such as recapitalization, blanket guarantees, and regulatory forbearance have recently attracted a lot of attention (Black and Hazelwood, 2012;Dam and Koetter, 2012;Giannetti and Simonov, 2011;Honohan and Klingebiel, 2003;Laeven and Valencia, 2011), there is still a lack of conclusive empirical evidence on the real eects of strict implementation of insolvency and resolution regimes.…”

Section: Non-technical Summarymentioning

confidence: 99%

Catharsis—The real effects of bank insolvency and resolution

Korte

2015

Journal of Financial Stability

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implemented by relating bank assets that have been resolved after undercutting a specic capital ratio to all bank assets of banks that have undercut this ratio. Hence, the indicator essentially captures the idea of how rules-based failed banks are resolved. In addition,we construct a panel of more than 2 million rm-year observations containing economic performance data of non-nancial rms. As the relation between real economic growth and the nancial system might be prone to reverse causality and endogeneity issues, we employ an identication framework consisting of several econometric techniques which helps us establish causality.Our results conrm the hypothesis of a positive`catharsis eect' and yield three important ndings. First, we nd a comparably stronger implementation of a hypothetical positive capital closure rule to have a positive and statistically as well as economically signicant eect on individual rm growth. To underline the causality of this relation, we show that the eect is particularly pronounced for rms that are structurally more dependent on bank nancing. With regard to economic signicance, our results suggest that the`catharsis eect' can cause a dierence of roughly 0.4 to 0.6 percentage points in rms' growth rates. Second, investigating the transmission channels of the`catharsis eect', we nd that it essentially works through beneting better quality rms (`quality channel') and reallocating credit towards rms that need it most (`quantity channel').Third, additional analyses suggest that the`catharsis eect' works best under specic economic conditions, for example in open banking systems that provide high access to international nance and hence mitigate potential negative consequences of insolvent bank liquidation. All our ndings are robust to various specications.Taken together, our results strongly underline the signicance of bank insolvency and resolution for the real economy. AbstractIn general, banks play a growth-enhancing role for the real economy. However, distorted incentives for banks, depositors, and regulators in connection with bank insolvency may corrupt banks' credit allocation and monitoring decisions, leading to suboptimal real economic outcomes. A rules-based prompt resolution regime for insolvent banks may reestablish the incentive system and provide for economically superior credit allocation and monitoring. We test the hypothesis that regulatory insolvency has a cathartic eect using a large rm-level dataset and proposing a new indicator to measure the strength of catharsis. Employing an instrumental variable setup and an interaction approach, we try to overcome concerns about causality and potential endogeneity which are usually inherent to research into the real economic implications of bank regulation. We nd a comparably stronger implementation of a hypothetical positive capital closure rule to have a positive and statistically as well as economically signicant eect on individual rm growth -particularly for rms that are structurally more dependent on bank nancing. Our ndings ...

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The effect of TARP on bank risk-taking

Cited by 217 publications

References 30 publications

International Evidence on Government Support and Risk Taking in the Banking Sector

International Evidence on Government Support and Risk Taking in the Banking Sector

Wishful thinking or effective threat? Tightening bank resolution regimes and bank risk-taking

Catharsis—The real effects of bank insolvency and resolution

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