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TARP and Market Discipline: Evidence on the Moral Hazard Effects of Bank Recapitalizations

In English

Författare

Summary, in English

We examine the moral hazard effects of bank recapitalizations by assessing the impact of the U.S. TARP program on market discipline exerted by subordinated debt-holders using a sample of 123 bank holding companies over the period 2004-2013. Predicted distress risk has a consistently positive and significant effect on sub-debt spreads, suggesting the presence of market discipline. A higher bailout probability significantly reduces the risk-sensitivity of spreads for the full sample, indicating a moral hazard effect of recapitalizations. This appears to be a too-big-to-fail effect, as it is absent when the largest banks are dropped from the sample. Results indicate that it is transitory. We also find a large effect of the crisis, appearing both as a uniform rise in, and a heightened risk sensitivity of, sub-debt spreads during the crisis.

Publiceringsår

2016

Språk

Engelska

Publikation/Tidskrift/Serie

Working Papers

Issue

2016:10

Dokumenttyp

Working paper

Förlag

Department of Economics, Lund University

Ämne

  • Economics and Business

Nyckelord

  • Bank bailouts
  • moral hazard
  • distress risk
  • capital injections
  • TARP
  • CPP
  • market discipline
  • financial crisis
  • E50
  • G01
  • G21
  • G28
  • H12

Status

Published