The Effects of Resolution Methods and Industry Stress on the Loss on Assets from Bank Failures

FDIC Center for Financial Research Working Paper No. 2009-11

Journal of Financial Stability, Forthcoming

Robert H. Smith School Research Paper No. RHS 06-143

51 Pages Posted: 24 Feb 2010 Last revised: 14 Sep 2014

See all articles by Rosalind L. Bennett

Rosalind L. Bennett

FDIC, Division of Insurance and Research

Haluk Unal

University of Maryland - Robert H. Smith School of Business

Date Written: July 2014

Abstract

In this paper, we examine how the cost of resolving bank failures differs between an FDIC liquidation and a private-sector resolution where the assets remain in the banking system. Our findings show that private-sector resolutions do not deliver the expected cost-savings prior to the passage of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991. We obtain this result when we control for the selection bias that arises from the resolution process. In contrast, during the post-FDICIA period, we observe that private-sector resolutions yield significant cost savings over FDIC liquidations. We also find that the direct costs are lower for private-sector resolutions over the sample period. We derive these results from a sample that spans all failures between 1986 and 2007.

Keywords: Bank Failures, Bankruptcy Costs, Bank Resolution Costs, FDIC Receivership

JEL Classification: G21, G28, G33

Suggested Citation

Bennett, Rosalind L. and Unal, Haluk, The Effects of Resolution Methods and Industry Stress on the Loss on Assets from Bank Failures (July 2014). FDIC Center for Financial Research Working Paper No. 2009-11, Journal of Financial Stability, Forthcoming, Robert H. Smith School Research Paper No. RHS 06-143, Available at SSRN: https://ssrn.com/abstract=1558445 or http://dx.doi.org/10.2139/ssrn.1558445

Rosalind L. Bennett (Contact Author)

FDIC, Division of Insurance and Research ( email )

550 Seventeenth Street, NW
Washington, DC 20057
United States
202-898-7160 (Phone)

Haluk Unal

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2256 (Phone)
301-405 0359 (Fax)

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