Paulson Plan Credits

The Capital Purchase Plan (CPP) is one of the main ingredients of the Paulson Plan. In accordance with the CPP, U.S. federal agencies invested more than $200 billion in approximately 700 financial institutions in 2008 and 2009. This article examines whether the CPP as a major public intervention helped to decrease financial institutions’ systemic risk contribution. We use ΔCoVaR (Adrian and Brunnermeier, 2016) as measure of systemic risk contribution, as well as a difference-in-difference test. Size, business model and CPP timing all matters when it comes to identify the effects of the CPP. In particular, October 2008 recipients, a limited sample of major industry players, underwent an increase in their systemic risk contribution after CPP funding. This result suggests either a moral hazard issue and/or an indirect effect of the financial industry restructuring in the wake of the Lehman Brothers collapse.