Academic journal article Federal Reserve Bank of St. Louis Review

TARP Beneficiaries and Their Lending Patterns during the Financial Crisis

Academic journal article Federal Reserve Bank of St. Louis Review

TARP Beneficiaries and Their Lending Patterns during the Financial Crisis

Article excerpt

This paper provides a systematic analysis of the lending performance of U.S. commercial banks and savings institutions that received financial support through the Capital Purchase Program (CPP) established in October 2008. The authors combine U.S. Treasury data on recipients of the CPP with quarterly financial data for the entire population of depository institutions to reconstruct aggregate lending and gross credit flows (expansion and contraction). CPP institutions experienced a less severe lending contraction than non-CPP institutions for all types of loans and bank asset levels. The authors find no evidence of unusual reallocation of lending across depository institutions. (JEL E44, E51, G21)

Federal Reserve Banks of St. Louis Review, March/April 2011, 93(2), pp. 105-25.

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Analyses of disaggregated commercial bank data reveal substantial heterogeneity among groups of banks along various dimensions of activity, including the dynamics of lending. This paper undertakes a systematic analysis of the lending performance of U.S. depository institutions (banks and thrifts, termed Dis hereafter) that distinguishes between two groups: the Dis that received financial support through the Capital Purchase Program (CPP) of the Troubled Asset Relief Program (TARP) of 2008-10 and those that did not receive any assistance through this program (non-CPP).

Analyses of the lending patterns are relevant because the explicitly stated objective of the CPP and other related programs was to slow the lending decline. (1) Therefore, the objective of our analysis is to identify possible prima facie differences in lending patterns in these two groups of Dis to pave the way for further analysis on the impact of the CPP on lending. The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP, 2009a) scrutinized the lending behavior of nine large financial institutions that received CPP assistance and found a contraction in their lending, suggesting that the CPP program did not deliver what it promised. Our analysis is more extensive--in fact, as extensive as feasible: We study the entire population of U.S. commercial banks and thrifts. We construct a novel dataset based on four sources of data. We first combine public regulatory data at the level of the individual financial institution--namely, loans of all U.S. commercial banks (through Call Reports [CRs]) and thrifts [through Thrift Financial Reports [TFRs]). (2) This allows us to use data on cross-mergers and acquisitions to control for situations in which a bank acquires one or more thrifts and vice versa. We then match Treasury data on the CPP disbursement to the CRs and TFRs (summarized in the "Data and Descriptive Statistics" section). Using this dataset we study aggregate and gross credit flows series for U.S. commercial banks and thrifts between 1998:Q1 and 2010:Q2, dividing them into CPP and non-CPP beneficiaries. (3)

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We show that the Dis that received CPP assistance exhibited less contraction than non-CPP beneficiaries. This is particularly evident for real estate lending and relatively larger institutions. We emphasize that a better performance of CPP beneficiaries may be due to either the fact that the CPP actually slowed the decline in lending or to selection and endogeneity problems that are not addressed here but which we attempt to analyze in related research. We then use gross credit flows (expansion and contraction) to determine whether unusual reallocation of credit occurred across banks during the crisis and find no evidence of this in our data.

THE TARP: AN OVERVIEW

The TARP is part of the Emergency Economic Stabilization Act signed into law on October 3, 2008. This and other events pertaining to the financial crisis are shown in the timeline of selected events in Figure 1. The initial plan proposed by U.S. Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke was to allow the U. …

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