TARP and Market Discipline: Evidence on the Moral Hazard Effects of Bank Recapitalizations
(2016) In Working Papers- 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... (More)
- 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. (Less)
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/28d093d9-94ca-4a56-8803-5c87923a1936
- author
- Forssbaeck, Jens LU and Nielsen, Caren Yinxia LU
- organization
- publishing date
- 2016
- type
- Working paper/Preprint
- publication status
- published
- subject
- keywords
- Bank bailouts, moral hazard, distress risk, capital injections, TARP, CPP, market discipline, financial crisis, E50, G01, G21, G28, H12
- in
- Working Papers
- issue
- 2016:10
- pages
- 49 pages
- publisher
- Department of Economics, Lund University
- language
- English
- LU publication?
- yes
- id
- 28d093d9-94ca-4a56-8803-5c87923a1936
- alternative location
- http://swopec.hhs.se/lunewp/abs/lunewp2016_010.htm
- date added to LUP
- 2016-06-15 11:30:54
- date last changed
- 2018-11-21 21:24:14
@misc{28d093d9-94ca-4a56-8803-5c87923a1936, 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.}}, author = {{Forssbaeck, Jens and Nielsen, Caren Yinxia}}, keywords = {{Bank bailouts; moral hazard; distress risk; capital injections; TARP; CPP; market discipline; financial crisis; E50; G01; G21; G28; H12}}, language = {{eng}}, note = {{Working Paper}}, number = {{2016:10}}, publisher = {{Department of Economics, Lund University}}, series = {{Working Papers}}, title = {{TARP and Market Discipline: Evidence on the Moral Hazard Effects of Bank Recapitalizations}}, url = {{http://swopec.hhs.se/lunewp/abs/lunewp2016_010.htm}}, year = {{2016}}, }