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

June 11, 2014


Abstract:     
We estimate a dynamic model of the decision to close a troubled bank. Regulators trade off an aversion to closing banks against the risk that allowing a bank to continue will raise the eventual costs to the deposit insurance fund. Using a conditional choice probability approach, we estimate the costs associated with closing banks, both in direct costs to the insurance fund and in other costs perceived by regulators, either social or personal. We find that delayed closures were driven by a desire to defer costs, an aversion to closing the largest and smallest troubled banks, and political influence.

Number of Pages in PDF File: 74

Keywords: bank failures, dynamic structural estimation

JEL Classification: E53, G28

working papers series


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Date posted: October 18, 2012 ; Last revised: June 12, 2014

Suggested Citation

Kang, Ari Choi and Lowery, Richard and Wardlaw, Malcolm, The Costs of Closing Failed Banks: A Structural Estimation of Regulatory Incentives (June 11, 2014). 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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