The Consequences of a Policy of Necessity: Bank Regulatory Forbearance, 1986-1989
Keith J. Leggett
Davis and Elkins College
Journal of Economics and Finance, Spring 1994.
While it is widely recognized that bank regulators choose the policy of forbearance because of an undercapitalized bank insurance fund, a key policy question centers on what were the effects of forbearance. This study uses a survival model to track capital deficient banks from December 1986 to December 1989, a period in which regulators explicitly used forbearance in managing troubled banks. Despite the contention that forbearance returns banks to safe-and-sound practices, this study concludes that forbearance did not enable troubled banks to return to viability. Furthermore, the evidence from the survival analysis provides negligible support, if any, for the interrelationship between forbearance and too-big-to-fail doctrine.
JEL Classification: G21, G28Accepted Paper Series
Date posted: May 4, 2000
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