Did TARP Distort Competition Among Sound Unsupported Banks?

27 Pages Posted: 26 Feb 2016

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: April 2016

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. Loan rates were higher, and the risk premium required by depositors was lower 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. 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.

JEL Classification: G21, G28, L51

Suggested Citation

Koetter, Michael and Noth, Felix, Did TARP Distort Competition Among Sound Unsupported Banks? (April 2016). Economic Inquiry, Vol. 54, Issue 2, pp. 994-1020, 2016, Available at SSRN: https://ssrn.com/abstract=2738270 or http://dx.doi.org/10.1111/ecin.12281

Michael Koetter (Contact Author)

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

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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