Selling Failed Banks

63 Pages Posted: 17 Aug 2014 Last revised: 14 May 2015

Multiple version iconThere are 2 versions of this paper

Date Written: April 10, 2015

Abstract

We show that the allocation of failed banks in the Great Recession was likely distorted because potential acquirers of these banks were poorly capitalized. We illustrate this phenomenon within a model of auctions with budget constraints. In our model poor capitalization of some potential acquirers drives a wedge between their willingness to pay and the ability to pay for a failed bank. Using our framework, we infer three characteristics that drive potential acquirers’ willingness to pay for a failed bank in the data: geographic proximity, bank specialization, and increased market concentration. Consistent with predictions of our model, we find that low capitalization of potential acquirers decreases their ability to acquire a failed bank. Finally, we show that the wedge between potential acquirers’ willingness and ability to pay distorts the allocation of failed banks. The costs of this misallocation are substantial, as measured by the additional resolution costs of the FDIC. These findings have direct implications for the design of the bank resolution process.

Keywords: Failed banks, Banking crisis, Regulation, Bail-outs, Resolution

JEL Classification: E65, G18, G21

Suggested Citation

Granja, Joao and Matvos, Gregor and Seru, Amit, Selling Failed Banks (April 10, 2015). Fama-Miller Working Paper, Available at SSRN: https://ssrn.com/abstract=2481128 or http://dx.doi.org/10.2139/ssrn.2481128

Joao Granja

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Room 326
Chicago, IL 60637
United States

Gregor Matvos

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

HOME PAGE: http://https://sites.google.com/site/gmatvos/

Amit Seru (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

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