The Resolution of Failed Banks During the Crisis: Acquirer Performance and FDIC Guarantees, 2008-2013

Posted: 25 Jul 2012 Last revised: 7 Oct 2015

Date Written: December 24, 2014

Abstract

We find that winning bidders in FDIC failed bank auctions from 2008 to 2013 experience substantial positive abnormal stock returns. Returns are inversely related to bid amounts after controlling for bid determinants, consistent with wealth transfers from the FDIC providing implicit subsidies to acquirers. The results challenge arguments that wealth transfers in earlier crises stemmed from since-eliminated bidding restrictions, but support the prediction of cash-in-the-market pricing theory that during crises, resolution through acquisition requires subsidization. Winning bid amounts are related to proxies for cash-in-the-market pricing. FDIC loss sharing, not widely used before the recent failure wave, is an important influence on bids.

Keywords: failed banks, loss sharing, FDIC, acquirer gains, cash-in-the-market pricing, resolution, financial crisis

JEL Classification: G20, G21, G28, G34

Suggested Citation

Cowan, Arnold R. and Salotti, Valentina, The Resolution of Failed Banks During the Crisis: Acquirer Performance and FDIC Guarantees, 2008-2013 (December 24, 2014). Journal of Banking & Finance 54 (2015) 222–238 DOI: 10.1016/j.jbankfin.2014.12.016, Available at SSRN: https://ssrn.com/abstract=2117574 or http://dx.doi.org/10.2139/ssrn.2117574

Arnold R. Cowan

Iowa State University ( email )

College of Business
3344 Gerdin Business Building
Ames, IA 50011-1350
United States

HOME PAGE: http://www.bus.iastate.edu/arnie

Valentina Salotti (Contact Author)

Iowa State University ( email )

613 Wallace Road
Ames, IA 50011-2063
United States

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