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Unintended Consequences Of Government Bailouts: Evidence From Bank-Dependent Borrowers Of Large Banks

Author

Listed:
  • Yupeng Lin

    (NUS Business School)

  • Xin Liu

    (National University of Singapore)

  • Anand Srinivasan

    (Center for Advanced Financial Research and Learning (CAFRAL))

Abstract

Using the Troubled Asset Relief Program (TARP) as a laboratory, this paper examines the impacts of bank bailouts on bank-dependent clients. We find that large TARP recipient banks reduce credit supply to dependent borrowers in the post-TARP period. Such effect is more pronounced when recipient banks hoard more liquidity ex-post. We further show that a large fraction of credit supply reduction is due to regulatory uncertainty. This negative shock via credit channel causes dependent borrowers to become more constrained financially. Ex-ante analysis also reveals a significant valuation loss for these borrowers around the announcements of their main banks’ TARP approvals.

Suggested Citation

  • Yupeng Lin & Xin Liu & Anand Srinivasan, 2017. "Unintended Consequences Of Government Bailouts: Evidence From Bank-Dependent Borrowers Of Large Banks," Working Papers 022306, Centre for Advanced Financial Research and Learning (CAFRAL).
    • Handle: RePEc:ris:cafral:022306
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