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Escaping TARP

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  • Wilson, Linus
  • Wu, Yan Wendy
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    Abstract

    This paper studies the factors that were associated with a bank's early exit from the Troubled Asset Relief Program (TARP) in 2009. Executive pay restrictions were often a rationale cited for early TARP exit, and high levels of CEO pay in 2008 were associated with banks being significantly more likely to escape TARP. In addition, we find that larger publicly traded banks with better accounting performance, the stronger capital ratios, and fewer troubled loans and other assets exited early. Banks that raised private capital in 2009 were significantly more likely to return the taxpayers’ money early. The original eight TARP recipients, which received $165 billion of the $245 billion passed out, had weak tangible common equity ratios at the end of 2008, relative to other TARP recipients. Those eight banks raised common equity capital in 2009, and all at least partially exited the government's embrace.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Stability.

    Volume (Year): 8 (2012)
    Issue (Month): 1 ()
    Pages: 32-42

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    Handle: RePEc:eee:finsta:v:8:y:2012:i:1:p:32-42

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    Web page: http://www.elsevier.com/locate/jfstabil

    Related research

    Keywords: Bailout; Banks; Banking; Basel capital standards; Callable bonds; Capital ratios; Capital Purchase Program (CPP); Dividends; Emergency Economic Stabilization Act (EESA); Hybrid securities; Investment; Preferred stock; Targeted Investment Program (TIP); Troubled Asset Relief Program (TARP); U.S. Treasury; Warrants;

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    References

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    1. Philippon, Thomas & Schnabl, Philipp, 2009. "Efficient Recapitalization," CEPR Discussion Papers 7516, C.E.P.R. Discussion Papers.
    2. Kane, Edward J. & Klingebiel, Daniela, 2004. "Alternatives to blanket guarantees for containing a systemic crisis," Journal of Financial Stability, Elsevier, vol. 1(1), pages 31-63, September.
    3. Linus Wilson & Yan Wu, 2010. "Common (stock) sense about risk-shifting and bank bailouts," Financial Markets and Portfolio Management, Springer, vol. 24(1), pages 3-29, March.
    4. Acharya, Viral V., 2009. "A Theory of Systemic Risk and Design of Prudential Bank Regulation," CEPR Discussion Papers 7164, C.E.P.R. Discussion Papers.
    5. Veronesi, Pietro & Zingales, Luigi, 2009. "Paulson's Gift," CEPR Discussion Papers 7528, C.E.P.R. Discussion Papers.
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    Citations

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    Cited by:
    1. Linus Wilson & Yan Wu & Stephanie Prejean, 2014. "Are the Bailouts of Wall Street Complements or Substitutes?," Atlantic Economic Journal, International Atlantic Economic Society, vol. 42(1), pages 21-38, March.
    2. Li, Lei, 2013. "TARP funds distribution and bank loan supply," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4777-4792.
    3. Black, Lamont K. & Hazelwood, Lieu N., 2013. "The effect of TARP on bank risk-taking," Journal of Financial Stability, Elsevier, vol. 9(4), pages 790-803.
    4. Dumontaux, Nicolas & Pop, Adrian, 2013. "Understanding the market reaction to shockwaves: Evidence from the failure of Lehman Brothers," Journal of Financial Stability, Elsevier, vol. 9(3), pages 269-286.
    5. Linus Wilson, 2013. "TARP’s deadbeat banks," Review of Quantitative Finance and Accounting, Springer, vol. 41(4), pages 651-674, November.
    6. Fratianni, Michele & Marchionne, Francesco, 2013. "The fading stock market response to announcements of bank bailouts," Journal of Financial Stability, Elsevier, vol. 9(1), pages 69-89.
    7. Daniel Ferreira & David Kershaw & Tom Kirchmaier & Edmund Schuster, . "Shareholder Empowerment and Bank Bailouts," FMG Discussion Papers dp714, Financial Markets Group.
    8. Liu, Wei & Kolari, James W. & Kyle Tippens, T. & Fraser, Donald R., 2013. "Did capital infusions enhance bank recovery from the great recession?," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5048-5061.

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