The (Un)Desired Effects of Government Bailouts: The Impact of TARP on the Interbank Market and Bank Risk-Taking

42 Pages Posted: 23 Jul 2018 Last revised: 30 Mar 2019

See all articles by Patrick Behr

Patrick Behr

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE)

Weichao Wang

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE)

Date Written: March 27, 2019

Abstract

We analyze how the inflow of liquidity through TARP funds in the wake of the 2007/2008 financial crisis impacted banks’ interbank market activity. We show that TARP banks increased interbank market activity statistically and economically in a very significant way. Their interbank lending increased by 77% relative to the mean of the control group of non-TARP banks. We further show that among the TARP banks, the ones with increased interbank exposure also increased credit risk taking, in particular in the portfolio of commercial and corporate loans, while at the same time not increasing profitability. These findings suggest a new, heretofore not investigated channel through which TARP may have increased banks’ moral hazard incentives.

Keywords: Banks, Financial Crisis, Government Bailout, Interbank Market, Risk Taking, TARP

JEL Classification: E51, G01, G18, G21, G28

Suggested Citation

Behr, Patrick and Wang, Weichao, The (Un)Desired Effects of Government Bailouts: The Impact of TARP on the Interbank Market and Bank Risk-Taking (March 27, 2019). Available at SSRN: https://ssrn.com/abstract=3192503 or http://dx.doi.org/10.2139/ssrn.3192503

Patrick Behr (Contact Author)

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Brazil

Weichao Wang

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Brazil
21967137407 (Phone)

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