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
Date Written: June 7, 2018
We analyze how the large inflow of liquidity through TARP funds 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. The resulting higher interconnectedness may have triggered moral hazard incentives for TARP banks because of a higher probability of a future bailout. We further show that credit risk also increased, in particular in the portfolio of commercial and corporate loans, while at the same time not increasing profitability. These findings suggest heretofore uninvestigated and unintended TARP effects with unpredictable consequences for the banking system and financial stability.
Keywords: Banks, Financial Crisis, Government Bailout, Interbank Market, Risk Taking, TARP
JEL Classification: E51, G01, G18, G21, G28
Suggested Citation: Suggested Citation