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
Date Written: March 27, 2019
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: Suggested Citation