TARP Funds Distribution and Bank Loan Supply

48 Pages Posted: 2 Dec 2009 Last revised: 6 Sep 2013

See all articles by Lei Li

Lei Li

Federal Reserve Board

Date Written: August 3, 2013

Abstract

This paper investigates the determinants of the Troubled Asset Relief Program (TARP) funds distribution to banks and the stimulus effect of TARP investments on credit supply in the economy. Using banks' political and regulatory connections as instruments, this paper finds that TARP investments increased bank loan supply by an annualized rate of 6.36% for banks with below median Tier 1 capital ratios. This increase is found in all major types of loans and can be translated into $404 billion of additional loans for all TARP banks. On average, TARP banks employed about one-third of their TARP capital to support new loans and kept the rest to strengthen their balance sheets. Furthermore, there is little evidence that loans made by TARP banks had lower quality than those by non-TARP banks. In sum, this paper shows a positive stimulus effect of TARP on credit supply during the 2008-2009 financial crisis.

Keywords: TARP, CPP, political connection, regulatory connection, credit supply, loan demand

JEL Classification: E62, E65, G21, G28

Suggested Citation

Li, Lei, TARP Funds Distribution and Bank Loan Supply (August 3, 2013). Available at SSRN: https://ssrn.com/abstract=1515349 or http://dx.doi.org/10.2139/ssrn.1515349

Lei Li (Contact Author)

Federal Reserve Board ( email )

1801 K Street NW
Washington, DC 20036
United States

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