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

Patrick Behr and Weichao Wang

Journal of Banking & Finance, 2020, vol. 116, issue C

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.

Keywords: Banks; Financial crisis; Government bailout; Interbank market; Risk taking; TARP (search for similar items in EconPapers)
JEL-codes: E51 G01 G18 G21 G28 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jbankfin.2020.105820

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