To Lend Freely? The Effects of the Troubled Asset Relief Program (TARP) & Paycheck Protection Program (PPP) Bailouts on Bank Operating Performance Ratios

Abstract

This thesis examines two of the largest U.S. bailout programs in recent history – the Troubled Asset Relief Program (TARP) in response to the 2008 Global Financial Crisis and the Paycheck Protection Program addressing the 2020 Global COVID-19 Pandemic – and their effects on participating U.S. financial institutions’ operating performance ratios through three dimensions: profitability/earnings, credit risk/asset quality, and solvency. This paper employs a Propensity Score Matching (PSM) approach to construct comparable control groups and a Difference-in-Differences (DiD) framework incorporating fixed effects to estimate the causal effects of participating banks in the TARP and PPP programs. Results demonstrate that for both TARP and PPP, bank participation in the programs led to increased short-term profitability – ROA for TARP recipients and Noninterest Income Ratio for PPP lenders; however, these profitability gains were accompanied by elevated credit risk and compromised asset quality as both programs exhibited increased NPL Ratios (Nonperforming Loans), consistent with moral hazard. The results on solvency diverge, where TARP recipients showed no meaningful effect on the Solvency Ratio, whereas PPP banks experienced a significant, positive increase, indicating greater long-term financial resilience. The results are reinforced through a series of robustness checks and reveal that government interventions during times of economic distress can yield short-term profitability gains accompanied by exacerbated credit risk. More importantly, the design and structure of the bailout program may be critical: programs that allow banks to generate income while mitigating credit risk through government guarantees, such as the PPP, can produce greater long-term financial resilience than those that encouraged expanded lending capabilities without risk controls, as exhibited from the TARP program.