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
51 Pages Posted: 24 Feb 2010 Last revised: 14 Sep 2014
Date Written: July 2014
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: Suggested Citation