Safer Rations, Riskier Portfolios: Banks’ responses to Government Aid

R. Duchin, D. Sosyura

Research output: Working paperDiscussion paperOther research output

62 Downloads (Pure)

Abstract

Abstract: We study the effect of government assistance on bank risk taking. Using hand-collected data on bank applications for government investment funds, we investigate the effect of both application approvals and denials. To distinguish banks’ risk taking behavior from changes in economic conditions, we control for the volume and quality of credit demand based on micro-level data on home mortgages and corporate loans. Our difference-indifference analysis indicates that banks make riskier loans and shift investment portfolios toward riskier securities after being approved for government assistance. However, this shift in risk occurs mostly within the same asset class and, therefore, remains undetected by the closely-monitored capitalization levels, which indicate an improved capital position at approved banks. Consequently, these banks appear safer according to regulatory ratios, but show a significant increase in measures of volatility and default risk.
Original languageEnglish
Place of PublicationTilburg
PublisherEBC
Number of pages60
Volume2012-025
Publication statusPublished - 2012

Publication series

NameEBC Discussion Paper
Volume2012-025

Fingerprint

Government
Loans
Bank risk taking
Capitalization
Indifference
Default risk
Investment portfolio
Investment funds
Assets
Risk-taking behavior
Denial
Volatility risk
Mortgages
Credit
Economic conditions

Keywords

  • bailout
  • TARP
  • risk
  • lending
  • financial crisis
  • moral hazard

Cite this

Duchin, R., & Sosyura, D. (2012). Safer Rations, Riskier Portfolios: Banks’ responses to Government Aid. (EBC Discussion Paper; Vol. 2012-025). Tilburg: EBC.
Duchin, R. ; Sosyura, D. / Safer Rations, Riskier Portfolios : Banks’ responses to Government Aid. Tilburg : EBC, 2012. (EBC Discussion Paper).
@techreport{e67533e7f3884860b65e0fa7f0a9693b,
title = "Safer Rations, Riskier Portfolios: Banks’ responses to Government Aid",
abstract = "Abstract: We study the effect of government assistance on bank risk taking. Using hand-collected data on bank applications for government investment funds, we investigate the effect of both application approvals and denials. To distinguish banks’ risk taking behavior from changes in economic conditions, we control for the volume and quality of credit demand based on micro-level data on home mortgages and corporate loans. Our difference-indifference analysis indicates that banks make riskier loans and shift investment portfolios toward riskier securities after being approved for government assistance. However, this shift in risk occurs mostly within the same asset class and, therefore, remains undetected by the closely-monitored capitalization levels, which indicate an improved capital position at approved banks. Consequently, these banks appear safer according to regulatory ratios, but show a significant increase in measures of volatility and default risk.",
keywords = "bailout, TARP, risk, lending, financial crisis, moral hazard",
author = "R. Duchin and D. Sosyura",
note = "Pagination: 60",
year = "2012",
language = "English",
volume = "2012-025",
series = "EBC Discussion Paper",
publisher = "EBC",
type = "WorkingPaper",
institution = "EBC",

}

Duchin, R & Sosyura, D 2012 'Safer Rations, Riskier Portfolios: Banks’ responses to Government Aid' EBC Discussion Paper, vol. 2012-025, EBC, Tilburg.

Safer Rations, Riskier Portfolios : Banks’ responses to Government Aid. / Duchin, R.; Sosyura, D.

Tilburg : EBC, 2012. (EBC Discussion Paper; Vol. 2012-025).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Safer Rations, Riskier Portfolios

T2 - Banks’ responses to Government Aid

AU - Duchin, R.

AU - Sosyura, D.

N1 - Pagination: 60

PY - 2012

Y1 - 2012

N2 - Abstract: We study the effect of government assistance on bank risk taking. Using hand-collected data on bank applications for government investment funds, we investigate the effect of both application approvals and denials. To distinguish banks’ risk taking behavior from changes in economic conditions, we control for the volume and quality of credit demand based on micro-level data on home mortgages and corporate loans. Our difference-indifference analysis indicates that banks make riskier loans and shift investment portfolios toward riskier securities after being approved for government assistance. However, this shift in risk occurs mostly within the same asset class and, therefore, remains undetected by the closely-monitored capitalization levels, which indicate an improved capital position at approved banks. Consequently, these banks appear safer according to regulatory ratios, but show a significant increase in measures of volatility and default risk.

AB - Abstract: We study the effect of government assistance on bank risk taking. Using hand-collected data on bank applications for government investment funds, we investigate the effect of both application approvals and denials. To distinguish banks’ risk taking behavior from changes in economic conditions, we control for the volume and quality of credit demand based on micro-level data on home mortgages and corporate loans. Our difference-indifference analysis indicates that banks make riskier loans and shift investment portfolios toward riskier securities after being approved for government assistance. However, this shift in risk occurs mostly within the same asset class and, therefore, remains undetected by the closely-monitored capitalization levels, which indicate an improved capital position at approved banks. Consequently, these banks appear safer according to regulatory ratios, but show a significant increase in measures of volatility and default risk.

KW - bailout

KW - TARP

KW - risk

KW - lending

KW - financial crisis

KW - moral hazard

M3 - Discussion paper

VL - 2012-025

T3 - EBC Discussion Paper

BT - Safer Rations, Riskier Portfolios

PB - EBC

CY - Tilburg

ER -

Duchin R, Sosyura D. Safer Rations, Riskier Portfolios: Banks’ responses to Government Aid. Tilburg: EBC. 2012. (EBC Discussion Paper).