Banks that received bailout money from the U.S. government in 2008 and 2009 ended up approving riskier loans and devoting capital to risky investments after getting federal help, according to a new study by researchers at the University of Michigan. In the study, released Wednesday, data show the approval rate of
mortgage applications by the riskiest groups of borrowers increased by about 9% in 2009--equivalent to nearly $860 million in new loans to these groups. The researchers wrote that such a dynamic could be a "strategic response to federal capital requirements." A shift toward riskier lending practices within the same asset class (mortgages, for example) does not affect the capitalization ratios monitored by banking regulators, the study explained. "As a result, banks can achieve better capitalization levels," it said. Another key finding was that after receiving federal money, bailed-out banks increased their investments in risky securities, such as mortgage-backed securities and long-term corporate debt, by 9%, displacing safer assets, such as Treasury bonds, short-term paper and cash equivalents. The U.S. government established the Troubled Asset Relief Program (TARP) in late 2008. The Capital Purchase Program, the first and largest TARP initiative, invested $205 billion in more than 700 financial institutions during 2008-09.
mortgage applications by the riskiest groups of borrowers increased by about 9% in 2009--equivalent to nearly $860 million in new loans to these groups. The researchers wrote that such a dynamic could be a "strategic response to federal capital requirements." A shift toward riskier lending practices within the same asset class (mortgages, for example) does not affect the capitalization ratios monitored by banking regulators, the study explained. "As a result, banks can achieve better capitalization levels," it said. Another key finding was that after receiving federal money, bailed-out banks increased their investments in risky securities, such as mortgage-backed securities and long-term corporate debt, by 9%, displacing safer assets, such as Treasury bonds, short-term paper and cash equivalents. The U.S. government established the Troubled Asset Relief Program (TARP) in late 2008. The Capital Purchase Program, the first and largest TARP initiative, invested $205 billion in more than 700 financial institutions during 2008-09.
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