Did TARP Reduce or Increase Systemic Risk? The Effects of Government Aid on Financial System Stability
63 Pages Posted: 30 Sep 2016 Last revised: 12 Jan 2019
Date Written: January 11, 2019
Theory suggests that government aid to banks may either reduce or increase systemic risk. We are the first to address this issue empirically, analyzing the Troubled Assets Relief Program (TARP). Analysis suggests that TARP significantly reduced contributions to systemic risk, particularly for larger and safer banks, and those in better local economies. This occurred primarily through a capital cushion channel that reduced market leverage by increasing the value of common equity. Results are robust to endogeneity and selection bias checks. Findings yield policy conclusions about whether to aid banks, the best targets for future assistance, and short-term versus long-term effects.
Keywords: Government Assistance, TARP, Banks, Systemic risk, Financial Crises.
JEL Classification: G18, G21, G28.
Suggested Citation: Suggested Citation