Assessing TARP

Abstract:     
We study the government equity infusions and the incentives of banks to participate in the Capital Purchase Program (CPP) of the Troubled Asset Relief Program (TARP). We show that strong banks opted out of participating in CPP and that equity infusions were provided to banks that posed systemic risk, faced high financial distress costs, but had strong asset quality. Concerns over executive compensation restrictions accompanying TARP led banks to reject CPP infusions and exit the program. CPP infusions did not have meaningful certification effects but the subsequent stress tests conducted for the major banks had significant certification effects. We show that CPP equity infusions altered investor expectations regarding future regulatory interventions in the banking sector.

Number of Pages in PDF File: 41

Keywords: Troubled Asset Relief Program, TARP, CPP, Bailout, Banking Crisis

JEL Classification: G18, G21, G28

working papers series