Essays on the Financial Crisis, Financial Regulation, and Banks

The conventional wisdom was that the Capital Purchase Program (CPP), under the Troubled Asset Relief Program (TARP), would benefit large banks over small sized banks, magnifying the claim that banks were \u27Too Big to Fail\u27. In my first chapter, I examine whether investors react differently to important news regarding the CPP, depending on the asset size of banks. Using returns to common stock shareholders, I analyze the CPP announcement, bank capital infusions, and repayments and find that large banks, regardless of whether or not they entered into the CPP program and received capital, had large and significant returns at the time of the program\u27s announcement (approximately 10% and 7%, respectively). Compared to returns for investors of small banks, investors of large banks received a 7.5% higher return, indicating that investors of large banks initially thought that the TARP-CPP disproportionately helped larger banks. This \u27Too Big to Fail\u27 reaction is also prevalent when examining systematic risk (market risk), as the betas of large banks increased the year after banks received CPP capital, indicating that the capital was not enough to cover possible capital shortfalls or the loaned government capital would lead banks to be riskier in the future. My second chapter investigates the empirical relationship between a bank\u27s involvement in various nontraditional activities and the likelihood that a bank fails or receives TARP capital. Using a probit analysis, I estimate that banks are more likely to receive TARP capital if they have lower tier one capital ratios, lower ROAs, more real estate loans, more standby letters of credit and commercial letters of credit. My probit estimates of bank failure from 2007-2011 also suggest that these balance sheet variables and off balance sheet variables affect bank failures similarly. Previous studies that independently analyze bank failure or entry into TARP only include balance sheet variables. However, due to the increasing amount of securitized assets used for collateral during the financial crisis coupled with the increasing amount of bank failures and government bank bailouts, it is imperative to account for off balance sheet items in assessing the determinants of bank failures and bank bailouts in the probit analysis. The striking similarity in probit estimates for entry into TARP and bank failure suggest that TARP may have helped banks that otherwise would have failed