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.
Original language | English |
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Article number | 105820 |
Journal | Journal of Banking and Finance |
Volume | 116 |
DOIs | |
Publication status | Published - Jul 2020 |
Externally published | Yes |
Keywords
- Banks
- Financial crisis
- Government bailout
- Interbank market
- Risk taking
- TARP