The Effect Of Government Bailouts On Default Risk And Charter Values In Banking

Schenck, Natalya A.
January 2013
Banking & Finance Review;2013, Vol. 5 Issue 1, p61
Academic Journal
This paper examines the impact of the Troubled Asset Relief Program/Capital Purchase Program (TARP/CPP) participation and early repayments on the disciplinary role of bank charter values following the 2008 financial crisis. I find that the disciplinary role of bank charter value has been significantly impacted by the bailouts. TARP/CPP participants exhibit lower sensitivity of the market-based default risk to the changes in charter values compared to non-participants indicating the presence of moral hazard. The effect is most significant for the strongest banks that were able to repay the TARP/CPP funds early with private equity. This study contributes to the literature on the disciplinary role of bank charter values by focusing on the effects of the government bailouts.


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