Do Business Borrowers Benefit from Bank Bailouts? - The Effects of TARP on Loan Contract Terms

63 Pages Posted: 24 Feb 2016 Last revised: 4 Jul 2017

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Tanakorn Makaew

Securities and Exchange Commission (SEC)

Raluca A. Roman

Federal Reserve Bank of Philadelphia

Date Written: July 3, 2017

Abstract

We investigate benefits to business borrowers from bank bailouts – specifically the Troubled Asset Relief Program (TARP). Applying difference-in-difference methodology to loan-level data, we find more favorable contract terms in five dimensions – spread, amount, maturity, collateral, and covenants –suggesting increased credit supply to borrowers of bailed-out banks at the intensive margin. Findings are robust to dealing with endogeneity and other issues. Riskier borrowers benefit more, consistent with moral hazard exploitation. Small and unlisted borrowers benefit less, suggesting fewer benefits for more financially-constrained firms. Benefits accrue to both relationship and non-relationship borrowers. Results contribute to research and policy debates on bank bailouts.

Keywords: Bailouts, TARP, Bank Loans, Loan Contracting, Contract Terms, Financial Crisis

JEL Classification: G01, G21, G28

Suggested Citation

Berger, Allen N. and Makaew, Tanakorn and Roman, Raluca A., Do Business Borrowers Benefit from Bank Bailouts? - The Effects of TARP on Loan Contract Terms (July 3, 2017). Available at SSRN: https://ssrn.com/abstract=2736440 or http://dx.doi.org/10.2139/ssrn.2736440

Allen N. Berger

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tanakorn Makaew

Securities and Exchange Commission (SEC) ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States

Raluca A. Roman (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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