Decision-Making During the Crisis: Why Did the Treasury Let Commercial Banks Fail?

61 Pages Posted: 9 Feb 2015

See all articles by Ettore Croci

Ettore Croci

Catholic University of the Sacred Heart of Milan

Gerard Hertig

ETH Zurich; European Corporate Governance Institute (ECGI)

Eric Nowak

Swiss Finance Institute; University of Lugano

Date Written: January 29, 2015

Abstract

Limited attention has been paid to the comparative fate of banks benefiting from TARP Capital Purchase Program (CPP) funding and less fortunate banks subject to FDIC resolution. We address this omission by investigating two core issues. One is whether commercial banks that ended up being subject to FDIC resolution received CPP funds. The other is whether the non-allocation of CPP funds forced viable commercial banks into FDIC receivership. Our findings show almost no overlap between CPP-funded and FDIC-resolved commercial banks, but we provide evidence that a significant number of FDIC-resolved banks could have avoided receivership if they had been allocated CPP funding. By comparing estimated funding and resolution costs we also show that bailing out more banks would have been cost-efficient. While our results do not allow for any policy suggestion on the optimality of bail-outs per se, they suggest that once a bail-out program is already on the table, it is better to err on the side of rescuing too many rather than too few banks.

Keywords: Resolution, Bail-out, Commercial Bank, CPP, Financial crisis, Bankruptcy

JEL Classification: G21, G28, G33, K23, K29

Suggested Citation

Croci, Ettore and Hertig, Gerard and Nowak, Eric, Decision-Making During the Crisis: Why Did the Treasury Let Commercial Banks Fail? (January 29, 2015). European Corporate Governance Institute (ECGI) - Law Working Paper No. 281/2015. Available at SSRN: https://ssrn.com/abstract=2557717 or http://dx.doi.org/10.2139/ssrn.2557717

Ettore Croci

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

Gerard Hertig (Contact Author)

ETH Zurich ( email )

IFW E 49
Haldeneggsteig 4
CH-8092 Zurich
Switzerland
+4144-632-4008 (Phone)
+4144-632-1097 (Fax)

HOME PAGE: http://www.hertig.ethz.ch

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Eric Nowak

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Lugano ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland
+41-91-9124-637 (secr. -712) (Phone)
+41-91-9124-647 (Fax)

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