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

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

Raluca A. Roman

Federal Reserve Bank of Philadelphia

John Sedunov

Villanova University - Department of Finance

Date Written: January 11, 2019

Abstract

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

Berger, Allen N. and Roman, Raluca A. and Sedunov, John, Did TARP Reduce or Increase Systemic Risk? The Effects of Government Aid on Financial System Stability (January 11, 2019). Journal of Financial Intermediation, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2844817 or http://dx.doi.org/10.2139/ssrn.2844817

Allen N. Berger (Contact Author)

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

Raluca A. Roman

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

John Sedunov

Villanova University - Department of Finance ( email )

800 Lancaster Ave.
Villanova, PA 19085
United States
610-519-4374 (Phone)

HOME PAGE: http://homepage.villanova.edu/john.sedunov/

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