The (Un)Desired Effects of Government Bailouts: The Impact of TARP on the Interbank Market and Bank Risk-Taking
72 Pages Posted: 23 Jul 2018 Last revised: 16 Apr 2021
Date Written: March 27, 2019
Abstract
We analyze how the inflow of TARP funds in the wake of the 2007/2008 financial crisis impacted banks’ interbank market activity. We show that TARP banks’ interbank market activity was impacted in a statistically and economically significant way. Their interbank lending via federal funds sold increased by 77 percent relative to the mean of the control group of non-TARP banks. We further show that among the TARP banks, the most affected ones also increased credit risk taking, 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