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Safer ratios, riskier portfolios: Banks׳ response to government aid

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  • Duchin, Ran
  • Sosyura, Denis
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    Abstract

    Using novel data on bank applications to the Troubled Asset Relief Program (TARP), we study the effect of government assistance on bank risk taking. Bailed-out banks initiate riskier loans and shift assets toward riskier securities after receiving government support. However, this shift in risk occurs mostly within the same asset class and, therefore, remains undetected by regulatory capital ratios, which indicate improved capitalization at bailed-out banks. Consequently, these banks appear safer according to regulatory ratios, but show an increase in volatility and default risk. These findings are robust to controlling for credit demand and account for selection of TARP recipients by exploiting banks׳ geography-based political connections as an instrument for bailout approvals.

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    Bibliographic Info

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

    Volume (Year): 113 (2014)
    Issue (Month): 1 ()
    Pages: 1-28

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    Handle: RePEc:eee:jfinec:v:113:y:2014:i:1:p:1-28

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    Web page: http://www.elsevier.com/locate/inca/505576

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    Keywords: Bailout; TARP; Risk; Lending; Financial crisis; Moral hazard; Banking;

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    Cited by:
    1. Hryckiewicz, Aneta, 2014. "The problem with government interventions: The wrong banks, inadequate strategies, or ineffective measures?," MPRA Paper 56730, University Library of Munich, Germany.

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