TARP's Hidden Benefit
Executive pay provisions may have limited scope of controversial program, says CSOM's Carter
The executive pay provisions of TARP – the Troubled Asset Relief Program, intended to help banks weather the 2008-09 financial crisis – may have had the unintended benefit of reducing the scope of the program, according to a new report co-authored by Carroll School of Management Associate Professor of Accounting Mary Ellen Carter.
The report in the Journal of Banking, Finance & Accounting finds that pay provisions did discourage some banks from participating in TARP, according to Carter and co-authors 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.
“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,” Carter says. “Our study suggests that TARP may have been better designed than bankers would have you believe.”
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.
“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,” says Carter.
TARP is widely viewed as perhaps the most controversial of the many policy measures undertaken during the financial crisis. The US government originally budgeted $700 billion and ultimately paid out about $400 billion to shore up the American financial system. Some critics decried 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, as Carter and other experts note, TARP appears to have succeeded: Banks, for the most part, survived the crisis and are paying back the money.