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Do bank bailouts reduce or increase systemic risk? the effects of TARP on financial system stability

Raluca Roman (), Allen N. Berger and John Sedunov ()

No RWP 16-8, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: Theory suggests that bank bailouts may either reduce or increase systemic risk. This paper is the first to address this issue empirically, analyzing the U.S. Troubled Assets Relief Program (TARP). Difference-in-difference analysis suggests that TARP significantly reduced contributions to systemic risk, particularly for larger and safer banks located in better local economies. This occurred primarily through a capital cushion channel. {{p}} Results are robust to additional tests, including accounting for potential endogeneity and selection bias. Findings yield policy conclusions about the wisdom of bailouts, which banks might be the best targets for future bailouts, and the form these bailouts might take.

Keywords: Bailouts; Banks; Financial crises; Systemic risk; Troubled Assets Relief Program (TARP) (search for similar items in EconPapers)
JEL-codes: G18 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-cba
Date: 2016-10-04
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