Abstract

http://ssrn.com/abstract=2163051
 
 

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The Costs of Closing Failed Banks: A Structural Estimation of Regulatory Incentives


Ari Choi Kang


University of Texas at Austin - Department of Finance

Richard Lowery


University of Texas-Austin

Malcolm Wardlaw


University of Texas - Dallas

October 17, 2012


Abstract:     
We estimate a dynamic model of the decision of the Federal Deposit Insurance Corporation (FDIC) to close a troubled bank. The FDIC trades off the costs of bank closure against the risk of increased costs of closure in future periods. Further, the FDIC bears an additional non-monetary cost for closing banks, which represents the desire on the part of the regulator to keep institutions open. Our results indicate that, controlling for monetary costs, the FDIC avoids closing both the largest banks and the smallest banks and prefers closing banks facing more acute operational losses. We find some evidence of political influence on closure decisions. The estimated direct monetary costs associated with closing the median distressed bank is $1 million, with an additional non-monetary cost equivalent to $10 million denominated in lost taxpayer dollars. For banks that are most likely to be closed, however, the average monetary cost and the average non-monetary costs are both around $20 million.

Number of Pages in PDF File: 47

Keywords: bank failures, dynamic structural estimation

JEL Classification: E53, G28

working papers series


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Date posted: October 18, 2012 ; Last revised: September 27, 2013

Suggested Citation

Kang, Ari Choi and Lowery, Richard and Wardlaw, Malcolm, The Costs of Closing Failed Banks: A Structural Estimation of Regulatory Incentives (October 17, 2012). Available at SSRN: http://ssrn.com/abstract=2163051 or http://dx.doi.org/10.2139/ssrn.2163051

Contact Information

Ari Choi Kang
University of Texas at Austin - Department of Finance ( email )
Red McCombs School of Business
Austin, TX 78712
United States
Richard Lowery (Contact Author)
University of Texas-Austin ( email )
Red McCombs School of Business
Austin, TX 78712
United States
Malcolm Wardlaw
University of Texas - Dallas ( email )
2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States
972-883-5903 (Phone)
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