The longer-term impact of TARP on banks’ default risk

Abstract

We analyze the long-term effect of 2008 Troubled Asset Relief Program (TARP) funding through the default risk angle to further our understanding of the TARP program’s benefits and costs. Our sample includes the banks that received funding under the TARP program from October 2008 to December 2009 with the corresponding data on transaction dates, investment amounts and repayment schedules collected from the U.S. Department of the Treasury website, and for which the required financial date is available for the period from 2000 to 2017. We find that both the treatment group (banks receiving TARP funds) and the control group (banks not receiving TARP funds) of banks increased their default risk in the post-TARP period spanning almost a decade after the capital injection. Using a difference-in-difference approach, we find that the long-lasting impact of TARP funding is higher in TARP banks compared to banks that did not receive such funding. Our findings indicate that the TARP funds did not improve but worsened recipients’ default risk, supporting the moral hazard concerns of government guarantee programs.