The impact of TARP on bank efficiency

Abstract

This paper examines the impact of the Troubled Asset Relief Program (TARP) capital injections on the operational efficiency of commercial banks. Using a nonparametric Data Envelopment Analysis to measure bank efficiency, we document a deteriorating pattern in the operating efficiency for banks that received the capital injection from TARP funds that is not evident in non-TARP banks. We test the impact of TARP on the change in bank efficiency as well as the abnormal change in bank efficiency; yet, our results continue to hold. We attribute the decrease in the operating efficiency of TARP funded banks to the abated incentives of bank managers to adopt best practices that improve asset quality, and the moral hazard associated with bailouts. © 2012.