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

Research output: Working paper

Abstract

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.

Details

Authors
Organisations
Research areas and keywords

Subject classification (UKÄ) – MANDATORY

  • Economics and Business

Keywords

  • Bank bailouts, moral hazard, distress risk , capital injections, TARP, CPP , market discipline, financial crisis, E50, G01, G21 , G28, H12
Original languageEnglish
PublisherDepartment of Economics, Lund Universtiy
Number of pages49
Publication statusPublished - 2016
Publication categoryResearch

Publication series

NameWorking Papers
PublisherDepartment of Economics, Lund University
No.2016:10