@article{a3b7d432a180495e9df420e843008d3b,
title = "Safer ratios, riskier portfolios: Banks' response to government aid",
abstract = "Using novel data on bank applications to the Troubled Asset Relief Program (TARP), we study the effect of government assistance on bank risk taking. Bailed-out banks initiate riskier loans and shift assets toward riskier securities after receiving government support. However, this shift in risk occurs mostly within the same asset class and, therefore, remains undetected by regulatory capital ratios, which indicate improved capitalization at bailed-out banks. Consequently, these banks appear safer according to regulatory ratios, but show an increase in volatility and default risk. These findings are robust to controlling for credit demand and account for selection of TARP recipients by exploiting banks' geography-based political connections as an instrument for bailout approvals.",
keywords = "Bailout, Banking, Financial crisis, Lending, Moral hazard, Risk, TARP",
author = "Ran Duchin and Denis Sosyura",
note = "Funding Information: We thank the Mitsui Life Financial Center at the University of Michigan and the Millstein Center for Corporate Governance at Yale University for financial support. We gratefully acknowledge the helpful comments from an anonymous referee, Sumit Agarwal, Andrea Beltratti, Christa Bouwman, Andrew Ellul, Charles Hadlock, Vasso Ioannidou, Chris James, Augustin Landier, Gy{\"o}ngyi L{\'o}r{\'a}nth, Mitchell Petersen, Tigran Poghosyan, N.R. Prabhala, and James Vickery, as well as conference participants at the 2013 Western Finance Association (WFA) Annual Meeting, the 2013 Symposium on Financial Institutions and Financial Stability at the University of California at Davis, the 2013 Conference on Financing the Recovery after the Crisis at Bocconi University, the 2013 WU Gutmann Center Symposium on Sovereign Credit Risk and Asset Management, the 2012 NYU Credit Risk Conference, the 2012 Adam Smith Corporate Finance Conference at Oxford University, the 2012 Journal of Accounting Research Pre-Conference at the University of Chicago, the 2012 Singapore International Conference on Finance, the 2012 CEPR Conference on Finance and the Real Economy, the 2012 Financial Stability Conference at Tilburg University, the 2012 IBEFA Annual Meeting, the 2011 Financial Intermediation Research Society (FIRS) Annual Meeting, the 2011 FDIC Banking Research Conference, the 2011 FinLawMetrics Conference at Bocconi University, and the 2011 Michigan Finance and Economics Conference and seminar participants at the Board of Governors of the Federal Reserve System, Emory University, Hong Kong University of Science and Technology, Michigan State University, Norwegian Business School, Norwegian School of Economics, the University of Hong Kong, the University of Illinois at Urbana-Champaign, the University of Illinois at Chicago, the University of Maryland, the University of Michigan, the University of Washington, and Vanderbilt University. ",
year = "2014",
month = jul,
doi = "10.1016/j.jfineco.2014.03.005",
language = "English (US)",
volume = "113",
pages = "1--28",
journal = "Journal of Financial Economics",
issn = "0304-405X",
publisher = "Elsevier",
number = "1",
}