Unintended Consequences Of Government Bailouts: Evidence From Bank-Dependent Borrowers Of Large Banks

Yupeng Lin, Xin Liu and Anand Srinivasan
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Yupeng Lin: NUS Business School
Anand Srinivasan: Center for Advanced Financial Research and Learning (CAFRAL)

Working Papers from Centre for Advanced Financial Research and Learning (CAFRAL)

Abstract: Using the Troubled Asset Relief Program (TARP) as a laboratory, this paper examines the impacts of bank bailouts on bank-dependent clients. We find that large TARP recipient banks reduce credit supply to dependent borrowers in the post-TARP period. Such effect is more pronounced when recipient banks hoard more liquidity ex-post. We further show that a large fraction of credit supply reduction is due to regulatory uncertainty. This negative shock via credit channel causes dependent borrowers to become more constrained financially. Ex-ante analysis also reveals a significant valuation loss for these borrowers around the announcements of their main banks’ TARP approvals.

Pages: 51
Date: 2017-11
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