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The (un)intended effects of government bailouts: The impact of TARP on the interbank market and bank risk-taking

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  • Behr, Patrick
  • Wang, Weichao

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.

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  • Behr, Patrick & Wang, Weichao, 2020. "The (un)intended effects of government bailouts: The impact of TARP on the interbank market and bank risk-taking," Journal of Banking & Finance, Elsevier, vol. 116(C).
    • Handle: RePEc:eee:jbfina:v:116:y:2020:i:c:s037842662030087x
    DOI: 10.1016/j.jbankfin.2020.105820
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    1. Corbet, Shaen & Cumming, Douglas J. & Hou, Yang (Greg) & Hu, Yang & Oxley, Les, 2022. "Have crisis-induced banking supports influenced European bank performance, resilience and price discovery?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    2. Li, Mingming & Liu, Haiming & Chiang, Yao-Min, 2022. "Government intervention, leverage adjustment, and firm performance: Evidence from defaulting firms," Pacific-Basin Finance Journal, Elsevier, vol. 76(C).

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    More about this item

    Keywords

    Banks; Financial crisis; Government bailout; Interbank market; Risk taking; TARP;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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