Why Does the FDIC Sue?

39 Pages Posted: 6 Jan 2016 Last revised: 8 Feb 2016

Christoffer Koch

Federal Reserve Bank of Dallas

Ken Okamura

University of Oxford - Said Business School

Multiple version iconThere are 2 versions of this paper

Date Written: December 31, 2015

Abstract

Cases the Federal Deposit Insurance Corporation (FDIC) pursues against the directors and officers of failed commercial banks for (gross) negligence are important for the corporate governance of U.S. commercial banks. These cases shape the kernel of bank corporate governance, as they guide expectations of bankers and regulators. Ours is the first empirical study of such legal cases that define the limits of acceptable behavior under financial distress. We examine the differences in behavior of all 408 U.S. commercial banks that were taken into receivership between 2007–2012. Sued banks had different balance sheet dynamics in the three years prior to failure. These generally larger banks were faster growing, obtained riskier funding and were more “optimistic”. We find evidence that the behavior of bank boards adjusts in an out-of-sample set of banks. Our results suggest the FDIC does not only pursue “deep pockets”, but sets corporate governance standards for all banks by suing negligent directors and officers.

Keywords: Financial Stability, Corporate Governance, Bank Failures, Financial Ratios

Suggested Citation

Koch, Christoffer and Okamura, Ken, Why Does the FDIC Sue? (December 31, 2015). Saïd Business School WP 2015-24. Available at SSRN: https://ssrn.com/abstract=2711679 or http://dx.doi.org/10.2139/ssrn.2711679

Christoffer Koch (Contact Author)

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX Texas 75265-5906
United States

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

Ken Okamura

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
44-1865614825 (Phone)

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