41 Pages Posted: 27 Aug 2009 Last revised: 22 Sep 2012
Date Written: August 19, 2011
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: Suggested Citation
By Lei Li
By Won Yong Kim