Abstract
I investigate the determinants of TARP funds distribution to banks and the effect of TARP investments on bank loan growth. Using political and regulatory connections as instruments, I find that TARP investments increased bank loan growth by an annualized rate of 6.41% for banks with below median Tier 1 ratios, equivalent to $2.66 more loans for every one dollar of TARP investments. This increase in bank loan growth was found in all major types of loans. Banks' political and regulatory connections played a significant role in the allocation of TARP funds. Banks were more likely to receive TARP investments if they had connections to the Fed, to Representatives on finance committees, or to Representatives that received a greater fraction of their campaign contribution from finance-related industries.
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