Bank Bailouts and Competition - Did TARP Distort Competition Among Sound Banks?

45 Pages Posted: 24 Jun 2015

See all articles by Michael Koetter

Michael Koetter

Halle Institute for Economic Research

Felix Noth

Otto-von-Guericke-Universität Magdeburg; Halle Institute for Economic Research

Date Written: June 22, 2015

Abstract

This study investigates if the Troubled Asset Relief Program (TARP) distorted price competition in U.S. banking. Political indicators reveal bailout expectations after 2009, manifested as beliefs about the predicted probability of receiving equity support relative to failing during the TARP disbursement period. In addition, the TARP affected the competitive conduct of unsupported banks after the program stopped in the fourth quarter of 2009. The risk premium required by depositors was lower, and loan rates were higher for banks with higher bailout expectations. The interest margins of unsupported banks increased in the immediate aftermath of the TARP disbursement but not after 2010. These effects are economically very small though. No effects emerged for loan or deposit growth, which suggests that protected banks did not increase their market shares at the expense of less protected banks.

Keywords: bailout expectations; Banking; competition; TARP

JEL Classification: C30, C78, G21, G28, L51

Suggested Citation

Koetter, Michael and Noth, Felix, Bank Bailouts and Competition - Did TARP Distort Competition Among Sound Banks? (June 22, 2015). ECB Working Paper No. 1804, Available at SSRN: https://ssrn.com/abstract=2621567

Michael Koetter

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

HOME PAGE: http://www.iwh-halle.de/en/about-the-iwh/people/detail/michael-koetter/

Felix Noth (Contact Author)

Otto-von-Guericke-Universität Magdeburg ( email )

Universitätspl. 2
PSF 4120
Magdeburg, D-39106
Germany

Halle Institute for Economic Research

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
Halle, 06108
Germany

HOME PAGE: http://www.iwh-halle.de/asp/person.asp?fnh&Lang=e&Abteilung=fin

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