Intervention of Regulatory Bailouts in Loan Partnerships: Evidence of Tarp's Effect on Syndicated Loan Structures

Abstract

This paper is the first to assess the Troubled Asset Relief Program (TARP) at loan level by looking at the structure of loan syndicates. While the purpose of TARP was to stimulate the flow of credit during the economic downturn, the low cost of capital could have functioned as a double-edged sword by imprudently increasing lenders’ credit risk-appetite. Our analysis reveals two important findings: first we find that while TARP provided low cost funding during the crisis, it effectively prevented moral hazard by its participants as evidenced by the syndicated loans’ more diversified structures. This result is evident in three different measures of syndicated loan’s structure. Second, lender-loan level analyses suggest that TARP’s impact varied across lender groups. Although we find that TARP diversified syndicated loans’ structure in general, it also increased loan concentration among lead arrangers. This result is robust to propensity score matching, instrument variable analysis, alternate variable measures and subsample analysis. These findings support the agency hypothesis by documenting a greater share of lead arranger commitment during a period of time when credit monitoring was strengthened.