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

See all articles by Patrick Behr

Patrick Behr

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

Weichao Wang

Lee Shau Kee School of Business and Administration, Hong Kong Metropolitan University

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

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). Journal of Banking & Finance, Volume 116, July 2020, 105820, Available at SSRN: https://ssrn.com/abstract=3192503 or http://dx.doi.org/10.2139/ssrn.3192503

Patrick Behr

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

Brazil

Weichao Wang (Contact Author)

Lee Shau Kee School of Business and Administration, Hong Kong Metropolitan University ( email )

Hong Kong

HOME PAGE: http://www.weichaowang.com

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
122
Abstract Views
1,083
Rank
414,524
PlumX Metrics