The Costs of Closing Failed Banks: A Structural Estimation of Regulatory Incentives
Ari Choi Kang
University of Texas at Austin - Department of Finance
University of Texas-Austin
University of Texas - Dallas
June 11, 2014
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
Date posted: October 18, 2012 ; Last revised: June 12, 2014
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