U.S. banks that were sheltered by government bailout during the height of financial crisis took more credit risk afterward, according to a University of Michigan study released on Wednesday.
About 700 financial institutions received approximately $205 billion in bailout money as part of their participation in the Troubled Assets Relief Program (TARP) initiated by the government in 2008. Citigroup Inc. (C), Bank of America Corp. (BAC), Wells Fargo (WFC) and JPMorgan Chase (JPM) were among the banks that received the largest bailouts from the government.
The study found that after gaining ground with the bailout money, these banks aggravated their investments in risky securities than the less privileged banks that were deprived of government aid.
Though the overall lending volume of the TARP and non-TARP banks was almost same, the former institutions lent out a higher chunk to borrowers with weaker loan-to-income ratios for higher returns. Moreover, the TARP banks relocated some of the safer assets including Treasury bonds, short-term paper and cash equivalents as loans to borrowers with weak credit profiles.
It’s obvious that these banks had taken such a risky plunge to get higher and quicker returns to brush off the bailout burden at the earliest. But were these banks supposed to gamble with billions of taxpayers’ money? They ought to have remembered how the taxpayers sacrificed their bottom dollar to save the banks they pin their faith on. Instead, the banks reverted to their risky businesses, showing no obedience to lessons learned in the recent past.
This repeated risk taking ultimate resulted in further threats to the system. This has happened just because they didn’t pay for their previous mistakes. Risky assets have aggravated chances of collapse these days with the bailed out banks acting smart.
We wonder if the story will ever turn around. Whatever course of action the government is planning about punishing these institutions now, will they stop bailing out these banks?
The unclear goals of TARP have strengthened the perception that some big institutions are “too big to fail.” Precisely, these banks still have the malformed impression that Federal Reserve will always protect them from failing if they are in major financial trouble.
Quite obviously, if the TARP banks get the idea that a big shot will be there to save them whenever they are in dire straits, they will never hesitate to take extravagant risks. Unfortunately, taxpayers will have to suffer by bearing the cost if these institutions lose the gamble.
This time around, we can only caution the big names in the banking universe to stop expecting any more assistance from taxpayers if they dig their own hole. Thankfully, for the millions of hard-earning Americans, the Dodd-Frank act seconds our opinion.
TARP: Boon or Bane?
Despite all the criticism to TARP, we cannot but acknowledge its usefulness. Although the U.S. financial institutions are still grappling with weak revenue, diminishing loan demand and low liquidity challenges, they are now comparatively stable with financial support from the government.
Most importantly, most of the economic indicators reflect that the worst of the financial crisis is now behind us. This was not because of some magic or miracle, but the last ditch effort in the form of TARP.
However, the Treasury should clearly convey the message to large institutions that this is not going to be a regular practice. If they forget the past and indulge in risks, they should also save themselves from insolvency and collapse.
As long as the government is careful about resisting big institutions from excessive risk taking with its policies and rules, there is no question of a greater systemic threat arising again.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
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WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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