Events

Finance Seminar

Authors:

• Ran Duchin
  University of Michigan

• Denis Sosyura
  University of Michigan

We study the effect of government assistance on bank risk taking. Using hand-collected data on bank applications for government capital, we control for the selection of fund recipients and investigate the effect of both application approvals and denials. To distinguish banks' risk taking behavior from changes in economic conditions, we also control for the volume and quality of credit demand based on micro-level data on home mortgages and corporate loans. Our difference-in-difference analysis indicates that after the bailout, bailed banks approve riskier loans and shift investment portfolios toward riskier securities. However, this shift in risk occurs mostly within the same asset class and, therefore, has little effect on the closely-monitored capitalization levels. Consequently, bailed banks appear safer according to the capitalization requirements, but show a significant increase in market-based measures of risk.