Selling Failed Banks

51 Pages Posted: 25 Aug 2014 Last revised: 9 Oct 2021

See all articles by Joao Granja

Joao Granja

University of Chicago - Booth School of Business

Gregor Matvos

University of Texas at Austin - Department of Finance

Amit Seru

Stanford University

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Date Written: August 2014

Abstract

We study the recent episode of bank failures and provide simple facts to better understand who acquires failed banks and which forces drive the losses that the FDIC realizes from these sales. We document three distinct forces related to the allocation of failed banks to potential acquirers. First, a geographically proximate bank is significantly more likely to acquire a failed bank: only 15% of acquirers do not have branches within the state. Sales are more local in regions with more soft information. Second, a failed bank is more likely to be purchased by a bank that has a similar loan portfolio and that offers similar services, highlighting the role of failed banks' asset specificity. Third, low capitalization of potential acquirers decreases their ability to acquire a failed bank and potentially distorts failed bank allocation. The results are robust to restricting the data to actual bidders, confirming that they are not driven by auction eligibility criteria imposed by the FDIC. We relate these forces to FDIC losses from failed bank sales. We organize these facts using the fire sales framework of Shleifer and Vishny (1992). Our findings speak to recent policies that are predicated on the idea that a bank's ability to lend is embodied in its collection of assets and employees and cannot be easily replaced or sold.

Suggested Citation

Granja, Joao and Matvos, Gregor and Seru, Amit, Selling Failed Banks (August 2014). Available at SSRN: https://ssrn.com/abstract=2486400

Joao Granja (Contact Author)

University of Chicago - Booth School of Business ( email )

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

Gregor Matvos

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

Red McCombs School of Business
Austin, TX 78712
United States

Amit Seru

Stanford University ( email )

Stanford, CA 94305
United States

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