Assessing TARP

41 Pages Posted: 27 Aug 2009 Last revised: 22 Sep 2012

Dinara Bayazitova

University of North Carolina at Chapel Hill

Anil Shivdasani

University of North Carolina Kenan-Flagler Business School

Date Written: August 19, 2011

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.

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

JEL Classification: G18, G21, G28

Suggested Citation

Bayazitova, Dinara and Shivdasani, Anil, Assessing TARP (August 19, 2011). Available at SSRN: https://ssrn.com/abstract=1461884 or http://dx.doi.org/10.2139/ssrn.1461884

Dinara Bayazitova

University of North Carolina at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Anil Shivdasani (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3182 (Phone)
919-962-2068 (Fax)

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