| | Fed economists slam TARP (LTRO?) in a paper measuring the rescue fund's effect on risk-taking at TBTFs
By Daily Collateral
Published on ZeroHedge ( http://www.zerohedge.com)
Created 03/06/2012 - 21:21
 [1]
Submitted by Daily Collateral [1] on 03/06/2012 21:21 -0500
CDS [2] Congressional Oversight Panel [3] Creditors [4] European Central Bank [5] Eurozone [6] Moral Hazard [7] ratings [8] TARP [9]
Only a week after the ECB flooded the eurozone banking system with a massive liquidity injection designed to help banks achieve their funding needs and thereby prevent a credit crunch in the Euro area, two Fed officials in Washington have published a discussion paper [10] examining the effects of the Treasury's attempt to do the same thing in 2008 via TARP. The paper adds to the growing body of literature on the 2008 bailout an analysis of the effects it had on risk ratings in commercial loan portfolios at banks that took funds.
The results are neatly summarized in the figure below. Risk ratings on commercial loans made by large (total assets > $10B) and medium ($10B > total assets > $1B) banks both increased after the injections relative to before the injections and increased substantially after injections versus banks of the same size that did not take rescue funds. Interestingly, small ($1B > total assets) banks appear to have decreased risk taking after being bailed out:
 [11]
[11]
Below is the corresponding increase in interest rate spreads to prime, which the authors note "unfortunately is not possible to know whether the increased interest rates sufficiently accounted for the increased risk":
 [12]
This is golden: "Micco and Panizza (2006) point out that government-owned banks may stabilize credit because the government internalizes the benefits of a more stable macroeconomic environment." Normally one would expect a capital injection with the ostensible purpose of increasing lending to ceteris paribus result in the extension of loan originations to riskier segments; however, the capital injections were made in a time of severe contraction in lending growth. Loan data from the period in question therefore actually suggest that the riskier loans that were made post-capital injections were made in lieu of the relatively "safer" (and by safer, all that is meant is possessing lower risk ratings) loans that characterized the pre-crisis, pre-bailout environment.
This chart illustrates the trends in commercial and industrial loans outstanding surrounding the time of the bailouts:
 [13]
Below are excerpts from the paper that illustrate the authors' thinking on the reasons behind increased risk-taking at larger banks post-capital injection:
Public discourse subsequent to the program’s implementation revealed that TARP was implicitly expected to increase bank lending. Shortly after the first round of injections in October 2008 under the Capital Purchase Program (CPP), Anthony Ryan, Acting Treasury Under Secretary for domestic finance, said in a speech: “As these banks and institutions are reinforced and supported with taxpayer funds, they must meet their responsibility to lend” (Ryan, 2008) ... The following year, a congressional oversight panel charged with evaluating the TARP program issued a report which criticized the U.S. Treasury for having no ability to ensure that banks were lending the money that they received from the government (Congressional Oversight Panel, 2009).
There is clearly a moral hazard problem when government funds are used to generate shareholder value ... Hence, the banks may still choose to shift the risk to their creditors. This suggests that the size of the capital injection and the lack of any leverage-increasing prohibitions may have caused the inefficiency in the TARP program.
So, how did all of that government-induced credit extension work out?
Interestingly, the TARP banks were less capitalized than the non-TARP banks prior to the infusions, but became relatively less capitalized after the infusions. This suggests that these banks suffered larger losses in the later period of the sample.
Maybe it will work in Europe.
DailyCollateral.com [14] // [url=http://twitter.com/DailyCollateral]@DailyCollateral [15][/url]
Recent articles:
BIS: Clearing CDS through a CCP could cost “G14 dealers” $100B in margin requirements [16]
Probability Map: Morgan Stanley's Vincent Reinhart still says 75% chance of Fed QE3 by June [16]
Wall Street's weekend LTRO conversation: Stealth sovereign bailouts [17]
Similar Articles You Might Enjoy:
CDS Congressional Oversight Panel Creditors European Central Bank Eurozone Moral Hazard ratings TARP
Source URL: http://www.zerohedge.com/contributed/2012-10-06/fed-economists-slam-tarp-ltro-paper-measuring-rescue-funds-effect-risk-taking
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