03/07/2012 01:28 pm ET Updated Mar 07, 2012

TARP's Big Bank Recipients Taking More Risks, Lending Less Than Non-TARP Banks, Report Finds

The big banks that critics claim caused the financial crisis may have gotten bailed out, but they apparently haven't learned their lesson.

Large banks that got government bailouts through the Troubled Asset Relief Program (TARP) now are taking more risks than banks that didn't get taxpayer money, according to a working paper from the Federal Reserve.

The findings call into question one of the government's main justifications for TARP: that propping up large banks would stabilize a financial system at the brink and keep credit flowing. Instead, it seems that big banks that received the bailout funds -- many after pressure from government officials -- have been lending less than those that didn't get the money, according to the Fed. Furthermore, the loans that the bailed-out banks are making are riskier than those of their not-bailed out counterparts.

It appears that the biggest bailed out banks are proving the economic theory of moral hazard to be true -- namely that institutions that aren't punished for risk-taking will continue to take risks. On the other side, small banks that received bailout money now are taking fewer risks than other banks. That's probably because increased capital requirements for the small banks that received bailout money had a larger impact on smaller institutions, according to the Fed.

The Fed's findings echo concerns already raised by some experts that bailing out banks with few strings attached would create a tier of too-big-to-fail banks that continue to take excessive risks. Neil Barofsky, the former special inspector general of TARP, wrote last year that big banks "have become effectively guaranteed by the government no matter how reckless their behavior."

Nobel Prize laureate Joseph Stiglitz, a professor at Columbia University and a left-leaning economist, wrote in January that TARP hardly helped the economy, since much of the money went to bonuses instead of lending. "It was wrong to think that the bankers would mend their ways -- that they would start to lend, if only they were treated nicely enough," Stiglitz wrote.

But the Treasury Department has held fast in its defense of TARP. Treasury Secretary Timothy Geithner said that it "first put out the financial fire." Timothy Massad, the Treasury Department's acting assistant secretary for financial stability, said last year that "to suggest that [increased risk-taking] is TARP's main legacy is to ignore the facts, and to confuse the response to a crisis with the need to address the causes of the crisis," according to Bloomberg News.