The Costs of Closing Failed Banks: A Structural Estimation of Regulatory Incentives

74 Pages Posted: 18 Oct 2012 Last revised: 12 Jun 2014

Ari Choi Kang

University of Texas at Austin - Department of Finance

Richard Lowery

University of Texas-Austin

Malcolm Wardlaw

University of Texas - Dallas

Date Written: June 11, 2014

Abstract

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.

Keywords: bank failures, dynamic structural estimation

JEL Classification: E53, G28

Suggested Citation

Kang, Ari Choi and Lowery, Richard and Wardlaw, Malcolm, The Costs of Closing Failed Banks: A Structural Estimation of Regulatory Incentives (June 11, 2014). Available at SSRN: https://ssrn.com/abstract=2163051 or http://dx.doi.org/10.2139/ssrn.2163051

Ari Choi Kang

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Richard Lowery (Contact Author)

University of Texas-Austin ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Malcolm Wardlaw

University of Texas - Dallas ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States
972-883-5903 (Phone)

Paper statistics

Downloads
170
Rank
144,851
Abstract Views
869