Executive pay limits narrowed scope of TARP banking rescue

Nov 20, 2012

A study of 263 publicly traded banks approved for the Troubled Asset Relief Program finds that 35 banks may have rejected TARP dollars because of limits the program imposed on CEO pay, researchers report in the Journal of Banking, Finance & Accounting. Ultimately, the pay provisions may have limited the scope of the $400 billion program.

The executive pay provisions of the TARP – the Troubled Asset Relief Program – stoked controversy. Bankers claimed the rules would thwart their efforts to attract and retain the best executives. But the pay rules may have had an unintended benefit of reducing the scope of the program, researchers say.

A newly published report in the Journal of Banking, & Accounting finds that pay provisions did discourage some banks from participating in TARP, which was intended to help banks weather the 2008-2009 financial crisis, according to researchers Mary Ellen Carter of Boston College, Brian Cadman, of the University of Utah, and Luann J. Lynch, of the University of Virginia.

Examining 263 publicly traded banks that were approved for TARP, the new study found that 35 banks rejected the funds and that this decision was related to higher levels of CEO pay. But this decision didn't seem to hurt them – they fared just as well as their peers that did take TARP money. As a result, the pay provisions in TARP may have deterred banks that didn't really need the money from taking it.

The study also suggests that from a personal standpoint bankers may have been right to worry about TARP's pay limits: banks that took the funds did see higher executive turnover than those that didn't. But their performance didn't suffer. Banks that turned down TARP money—often derisively referred to as "bailouts"— did just as much lending afterwards and had just as much financial strength, measured in terms of capital ratios, as those that accepted it.

"While we don't know exactly why these banks refused the funds, we do know that some high-profile bankers complained that the pay restrictions were onerous. Our study suggests that TARP may have been better designed than bankers would have you believe," Carter said. "The restrictions gave financial incentives for bank executives to think carefully about participating and, if they did participate, to get out from underneath the program as quickly as possible."

TARP was, perhaps, the most controversial of the many policy measures undertaken during the financial crisis. The U.S. government originally budgeted $700 billion and ultimately paid out about $400 billion to shore up the U.S. financial system. Some viewed the program as corporate welfare while others saw it as creeping socialism. Nobody, but the bankers who needed the money, seemed to like it much. But in the end, TARP appears to have succeeded: , for the most part, survived the crisis and are paying back the money.

Explore further: Industrial clusters fuel economies, according to study

More information: onlinelibrary.wiley.com/doi/10… 57.2012.02307.x/full

add to favorites email to friend print save as pdf

Related Stories

Bailed-out banks issued riskier loans

Sep 15, 2011

Banks that received federal bailout money ended up approving riskier loans and shifting capital toward risky investments after getting government help, say University of Michigan researchers.

Banks and bailouts: Playing politics?

Dec 21, 2009

(PhysOrg.com) -- Banks with strong political connections were more likely to receive bailout money from the government—and more of it—in the past year than those with weaker ties, say University of Michigan researchers.

Banks team up for online payment system

May 27, 2011

Online and mobile customers of three major banks will be able to instantly zap funds from their accounts to other depositors at the banks under a program to be rolled out across the country over the coming year.

Stock ownership US Congress influenced voting on bailout

Mar 29, 2010

(PhysOrg.com) -- Personal investments in the stock of financial institutions by members of the House of Representatives and the Senate of the Unites States was positively associated with these institutions receiving bailout ...

Recommended for you

Industrial clusters fuel economies, according to study

15 hours ago

Experts have long theorized that having a cluster of firms within a given industry helps a region's economy grow. Now a study co-authored by an MIT professor shows empirically that clusters of almost all ...

Economic output less dependent on road transportation

16 hours ago

For the past 10 years, motorization in the U.S. has been on the decline, due mainly to more telecommuting, greater use of public transit, increased urbanization of the population and changes in the ages of drivers.

Economist outlines work on managing tasks and time

Dec 17, 2014

"When a man knows he is to be hanged in a fortnight," said Samuel Johnson, "it concentrates his mind wonderfully." Most of us, spared such an imperative, carry on in a less-concentrated state, but it holds ...

User comments : 1

Adjust slider to filter visible comments by rank

Display comments: newest first

rwinners
not rated yet Nov 20, 2012
What happened to the banks that refused to accept TARP money?

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.