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

Patrick Behr, Weichao Wang

Research output: Contribution to journalArticlepeer-review

9 Citations (Scopus)

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 languageEnglish
Article number105820
JournalJournal of Banking and Finance
Volume116
DOIs
Publication statusPublished - Jul 2020
Externally publishedYes

Keywords

  • Banks
  • Financial crisis
  • Government bailout
  • Interbank market
  • Risk taking
  • TARP

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