Government Support of Banks and Bank Lending

Abstract

The extraordinary steps taken by governments during the 2007-2009 financial crisis to prevent the failure of large financial institutions and support credit availability have invited heated debate. This paper comprehensively reviews empirical assessments of the benefits of those programs — such as their effectiveness in reducing bank failures or supporting new lending — introduces a combined dataset of five key programs that provided term debt or equity to banks in the U.S., and assesses the effects of such support on lending by U.S. banks. The results, using an instrumental variable approach, suggest that bank loans did not increase at institutions receiving government support.

Keywords: Bank Loans, TAF, TARP, Capital Purchase Program

JEL Classification: G11, G21, E58