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Determinants of the Allocation of Funds Under the Capital Purchase Program

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  • Varvara Isyuk

    () (Centre d’Economie de la Sorbonne, Universite´ Paris 1 Panthe´on)

Abstract

During 2008-09, as part of a wide-ranging rescue operation, the US Treasury poured capital infusions into a great many domestic financial institutions under the Capital Purchase Program (CPP), thus helping to avert a complete collapse of the US banking sector. In carrying out this effort, government regulators had to distinguish between those banks deserving of being bailed out and those that should be allowed to fail. The results of this study show that the CPP favored larger financial institutions whose potential failure represented higher degrees of systemic risk. This allocation of CPP funds was cost-effective from the point of view of taxpayers, as such banks reimbursed the government for their CPP bailouts sooner than expected. In contrast, smaller banks that were heavily into mortgage-backed securities, mortgages, and non-performing loans were less likely to be bailed out and, if they did receive CPP help, took longer to repurchase their shares from the Treasury. Several explanations of such allocation decisions are proposed in this paper, including adverse selection of the mortgage products kept on banks’ books and the Treasury’s approach to distinguishing between insolvent and temporarily illiquid institutions.

Suggested Citation

  • Varvara Isyuk, 2013. "Determinants of the Allocation of Funds Under the Capital Purchase Program," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 2(1), pages 79-114, January.
  • Handle: RePEc:tek:journl:v:2:y:2013:i:1:p:79-114
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    References listed on IDEAS

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    1. Kibritcioglu, Aykut, 2002. "Excessive Risk-Taking, Banking Sector Fragility, and Banking Crises," Working Papers 02-0114, University of Illinois at Urbana-Champaign, College of Business.
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    4. Bank for International Settlements, 2009. "An assessment of financial sector rescue programmes," BIS Papers, Bank for International Settlements, number 48.
    5. Varvara Isyuk, 2012. "CPP funds allocation : restoring financial stability or minimising risks of non-repayment to taxpayers ?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00755570, HAL.
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    More about this item

    Keywords

    Capital Purchase Program; bank recapitalization; systemic risk;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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