When Time Is Not on Our Side: The Costs of Regulatory Forbearance in the Closure of Insolvent Banks

50 Pages Posted: 27 Nov 2015 Last revised: 17 Mar 2017

See all articles by Rebel A. Cole

Rebel A. Cole

Florida Atlantic University

Lawrence J. White

New York University (NYU) - Leonard N. Stern School of Business, Department of Economics

Date Written: March 16, 2017

Abstract

In this paper, we empirically estimate the costs of delay in the FDIC’s closures of 433 commercial banks between 2007 and 2014 based upon a counterfactual closure regime. We find that the costs of delay could have been as high as $18.5 billion, or 37% of the FDIC’s estimated costs of closure of $49.8 billion. We think that these findings call for a more aggressive stance by bank regulators with respect to the provisions for loan losses and write-downs of banks’ non-performing assets. More aggressive (and earlier) provisions and write-downs, or adoption of a capital ratio that penalizes nonperforming loans, would allow the concept of “prompt corrective action” (PCA) to play the role that it was meant to play in reducing FDIC losses from insolvent banks.

Keywords: bank, bank failure, CAMELS, commercial real estate, failure cost, FDIC, financial crisis, forbearance, insolvent

JEL Classification: G17, G21, G28

Suggested Citation

Cole, Rebel A. and White, Lawrence J., When Time Is Not on Our Side: The Costs of Regulatory Forbearance in the Closure of Insolvent Banks (March 16, 2017). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2694556 or http://dx.doi.org/10.2139/ssrn.2694556

Rebel A. Cole

Florida Atlantic University ( email )

College of Business
777 Glades Road
Boca Raton, FL 33431
United States
1-561-297-4969 (Phone)

HOME PAGE: http://rebelcole.com

Lawrence J. White (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business, Department of Economics ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

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