The Capital Purchase Program and Subsequent Bank SEOs

57 Pages Posted: 14 Dec 2011 Last revised: 24 Jan 2015

Mozaffar Khan

University of Minnesota - Twin Cities - Carlson School of Management

Dushyantkumar Vyas

University of Toronto - Rotman School of Management; University of Toronto at Mississauga

Date Written: January 1, 2015

Abstract

We find that in the aftermath of the recent financial crisis banks replenished only 12% of crisis-related losses through SEOs in 2009 and 2010. However, SEOs are disproportionately conducted by Capital Purchase Program (CPP) recipients, and this is not explained by CPP recipients’ economic and regulatory capital needs. SEOs in 2009 and 2010 by CPP recipients alone account for 27% by number, and 50% by dollar amount, of all SEOs by U.S. banks between 1994 and 2010, indicating the CPP is an influential event in the history of U.S. bank SEOs during this period. Controlling for economic and regulatory capital determinants of SEOs, CPP recipients were more likely than non-recipients to have a SEO within four quarters subsequent to CPP receipt. SEO proceeds were used to repay CPP receipts without jeopardizing loan growth. Banks that received CPP funds prior to the passage of the American Recovery and Reinvestment Act (ARRA), and banks with greater reliance on non-traditional banking activities, were more likely to have a SEO expeditiously and repay CPP funds early. Collectively, the results provide new evidence on the realized consequences of the CPP for bank SEOs. Tests suggest the CPP’s indirect costs of restrictions on corporate policies and actions as the most likely explanation for the results.

Keywords: Financial crisis, Banking crisis, SEO, CPP, TARP, Bank Capital, Macroprudential perspective

JEL Classification: E4, E5, E6, G21, G28, G32, G38, M41

Suggested Citation

Khan, Mozaffar and Vyas, Dushyantkumar, The Capital Purchase Program and Subsequent Bank SEOs (January 1, 2015). Journal of Financial Stability, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1971531 or http://dx.doi.org/10.2139/ssrn.1971531

Mozaffar Khan (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Dushyantkumar Vyas

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada

University of Toronto at Mississauga ( email )

3359 Mississauga Rd N.
Mississauga, Ontario L5L 1C6
Canada

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