Safer ratios, riskier portfolios: Banks' response to government aid

Ran Duchin, Denis Sosyura

Research output: Contribution to journalArticle

101 Citations (Scopus)

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.

Original languageEnglish (US)
Pages (from-to)1-28
Number of pages28
JournalJournal of Financial Economics
Volume113
Issue number1
DOIs
StatePublished - Jan 1 2014
Externally publishedYes

Fingerprint

Government
Assets
Loans
Default risk
Credit
Bank risk taking
Volatility risk
Capital ratios
Government support
Geography
Bailout
Capitalization
Political connections
Regulatory capital

Keywords

  • Bailout
  • Banking
  • Financial crisis
  • Lending
  • Moral hazard
  • Risk
  • TARP

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

Cite this

Safer ratios, riskier portfolios : Banks' response to government aid. / Duchin, Ran; Sosyura, Denis.

In: Journal of Financial Economics, Vol. 113, No. 1, 01.01.2014, p. 1-28.

Research output: Contribution to journalArticle

@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",
year = "2014",
month = "1",
day = "1",
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",

}

TY - JOUR

T1 - Safer ratios, riskier portfolios

T2 - Banks' response to government aid

AU - Duchin, Ran

AU - Sosyura, Denis

PY - 2014/1/1

Y1 - 2014/1/1

N2 - 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.

AB - 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.

KW - Bailout

KW - Banking

KW - Financial crisis

KW - Lending

KW - Moral hazard

KW - Risk

KW - TARP

UR - http://www.scopus.com/inward/record.url?scp=84900459314&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84900459314&partnerID=8YFLogxK

U2 - 10.1016/j.jfineco.2014.03.005

DO - 10.1016/j.jfineco.2014.03.005

M3 - Article

AN - SCOPUS:84900459314

VL - 113

SP - 1

EP - 28

JO - Journal of Financial Economics

JF - Journal of Financial Economics

SN - 0304-405X

IS - 1

ER -