IDEAS home Printed from https://ideas.repec.org/p/fip/fedgif/1043.html
   My bibliography  Save this paper

The effect of TARP on bank risk-taking

Author

Listed:
  • Lamont K. Black
  • Lieu N. Hazelwood

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 risk taking 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.

Suggested Citation

  • Lamont K. Black & Lieu N. Hazelwood, 2012. "The effect of TARP on bank risk-taking," International Finance Discussion Papers 1043, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:1043
    as

    Download full text from publisher

    File URL: http://www.federalreserve.gov/pubs/ifdp/2012/1043/default.htm
    Download Restriction: no

    File URL: http://www.federalreserve.gov/pubs/ifdp/2012/1043/ifdp1043.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Berger, A.N. & Bouwman, C.H.S. & Kick, T. & Schaeck, K., 2011. "Bank risk taking and liquidity creation following regulatory interventions and capital support," Discussion Paper 2011-088, Tilburg University, Center for Economic Research.
    2. Micco, Alejandro & Panizza, Ugo, 2006. "Bank ownership and lending behavior," Economics Letters, Elsevier, vol. 93(2), pages 248-254, November.
    3. Fahlenbrach, Rüdiger & Stulz, René M., 2011. "Bank CEO incentives and the credit crisis," Journal of Financial Economics, Elsevier, vol. 99(1), pages 11-26, January.
    4. Hoshi, Takeo & Kashyap, Anil K, 2010. "Will the U.S. bank recapitalization succeed? Eight lessons from Japan," Journal of Financial Economics, Elsevier, vol. 97(3), pages 398-417, September.
    5. Berger, A.N. & Bouwman, C.H.S. & Kick, T. & Schaeck, K., 2011. "Bank risk taking and liquidity creation following regulatory interventions and capital support," Discussion Paper 2011-088, Tilburg University, Center for Economic Research.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Roman, Raluca, 2015. "Shareholder activism in banking," Research Working Paper RWP 15-9, Federal Reserve Bank of Kansas City.
    2. 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.
    3. Lambert, Claudia & Noth, Felix & Schüwer, Ulrich, 2017. "How do insured deposits affect bank risk? Evidence from the 2008 Emergency Economic Stabilization Act," Journal of Financial Intermediation, Elsevier, vol. 29(C), pages 81-102.
    4. Pennathur, Anita & Smith, Deborah & Subrahmanyam, Vijaya, 2014. "The stock market impact of government interventions on financial services industry groups: Evidence from the 2007–2009 crisis," Journal of Economics and Business, Elsevier, vol. 71(C), pages 22-44.
    5. Vincent Bouvatier & Michael Brei & Xi Yang, 2014. "Bank Failures and the Source of Strength Doctrine," EconomiX Working Papers 2014-15, University of Paris Nanterre, EconomiX.
    6. Hryckiewicz, Aneta, 2014. "What do we know about the impact of government interventions in the banking sector? An assessment of various bailout programs on bank behavior," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 246-265.
    7. Lin, Jyh-Horng & Tsai, Jeng-Yan & Hung, Wei-Ming, 2014. "Bank equity risk under bailout programs of loan guarantee and/or equity capital injection," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 263-274.
    8. Kim, Dohan & Sohn, Wook, 2017. "The effect of bank capital on lending: Does liquidity matter?," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 95-107.
    9. Luis Brandão Brandao Marques & Ricardo Correa & Horacio Sapriza, 2013. "International Evidence on Government Support and Risk Taking in the Banking Sector," IMF Working Papers 13/94, International Monetary Fund.
    10. Farruggio, Christian & Michalak, Tobias C. & Uhde, Andre, 2013. "The light and dark side of TARP," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2586-2604.
    11. Stefano Puddu & Andreas Waelchli, 2015. "TARP Effect on Bank Lending Behaviour: Evidence from the last Financial Crisis," IRENE Working Papers 15-06, IRENE Institute of Economic Research.
    12. Carpenter, Seth & Demiralp, Selva & Eisenschmidt, Jens, 2014. "The effectiveness of non-standard monetary policy in addressing liquidity risk during the financial crisis: The experiences of the Federal Reserve and the European Central Bank," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 107-129.
    13. TRENCA Ioan & PETRIA Nicolae & LUDUSAN Emilia-Anuta, 2015. "Exploring The Relationship Between Bank Profitability And State Intervention Policies In European Banking Sector," Revista Economica, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 67(5), pages 104-115, September.
    14. Li, Lei, 2013. "TARP funds distribution and bank loan supply," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4777-4792.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgif:1043. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (FRB Librarian). General contact details of provider: http://edirc.repec.org/data/frbgvus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.