Unintended Consequences of Government Bailouts: Evidence from Bank-Dependent Borrowers of Large Banks
51 Pages Posted: 1 Nov 2017
Date Written: September 1, 2017
Using the Troubled Asset Relief Program (TARP) as a laboratory, this paper examines the impacts of bank bailouts on bank-dependent clients. We find that large TARP recipient banks reduce credit supply to dependent borrowers in the post-TARP period. Such effect is more pronounced when recipient banks hoard more liquidity ex-post. We further show that a large fraction of credit supply reduction is due to regulatory uncertainty. This negative shock via credit channel causes dependent borrowers to become more constrained financially. Ex-ante analysis also reveals a significant valuation loss for these borrowers around the announcements of their main banks’ TARP approvals.
Keywords: Financial Crisis, Bailout, Investment, Event Study, Lending
JEL Classification: E51, G28, G21
Suggested Citation: Suggested Citation