Systemic Risk Channel and TARP: Banking Relationship Spillover in the Credit Default Swap Market

Wei-Ling Song and Cihan Uzmanoglu
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Wei-Ling Song: LA State University and Wharton Financial Institutions Centers, University of PA
Cihan Uzmanoglu: LA State University

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: This paper provides empirical evidence that liquidity provisions during financial crisis depend on the levels of bank health as suggested by Diamond (2001). TARP creates uneven benefits through unhealthy banks as more liquidity is provided to their borrowers with high credit ratings, low leverage ratios, and high collaterals - a more pronounced flight-to-quality phenomenon. It suggests that borrowers' own attributes are the main determinants of liquidity provisions despite TARP infusions. Conversely, healthy banks inject liquidity into their smaller and low collateral borrowers and mitigate the liquidity shocks of high leverage borrowers even prior to the TARP announcement suggesting a more across-the-board liquidity provision policy.

JEL-codes: G01 G21 G32 (search for similar items in EconPapers)
Date: 2011-08
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Citations: View citations in EconPapers (1)

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