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.
|Research areas and keywords
- Bank bailouts, moral hazard, distress risk , capital injections, TARP, CPP , market discipline, financial crisis, E50, G01, G21 , G28, H12
|Publisher||Department of Economics, Lund Universtiy|
|Number of pages||49|
|Publication status||Published - 2016|
|Publisher||Department of Economics, Lund University |