The Performance of Banks around the Receipt and Repayment of TARP Funds: Over-Achievers versus Under-Achievers

Abstract

In this paper, we look at how the pre-crisis health of banks is related to the probability of receiving and repaying TARP capital. We find that financial performance characteristics that are related to the probability of receiving TARP funds differ for the healthiest (“over-achiever”) versus the least healthy (“under-achiever”) banks. We find that TARP under-achievers have some, but not consistent, weaknesses in income production. These banks also are experiencing liquidity issues as customers, shut out of public debt markets, get bank loans through draw downs of loan commitments. Unlike TARP under-achievers, TARP over-achievers’ loans are performing well. TARP over-achievers see increases in their return on loans in 2008Q3. Yet, the loss of liquidity (from decreases in core deposits and draw downs of loan commitments) hurt the abilities of these banks to continue their lending. Differences between under-achiever and over-achiever banks are also found for repayment and deadbeat TARP banks.

Keywords: Financial institutions, financial crisis, TARP, CPP

JEL Classification: G01, G11, G21, G28