Does Going Easy on Distressed Banks Help the Macroeconomy?
50 Pages Posted: 5 Oct 2017 Last revised: 12 Jul 2018
Date Written: January 1, 2018
During banking crises, regulators often relax their requirements and refrain from closing troubled banks. I estimate the real effects of such regulatory forbearance during the U.S. savings and loan crisis by comparing states' economic outcomes by the amount of forbearance they receive. As instruments, I use historical variation in deposit insurance of similar financial intermediaries (thrifts) and exploit geographic variation in principal supervisory agent (PSA). The evidence suggests a policy-induced real estate boom during forbearance (1982-89), followed by a bigger bust in real estate and real GDP. The relationship does not appear driven by the ex ante size, industry exposure, or systematic cyclicality of a state.
Keywords: financial crises, regulatory policy
JEL Classification: G01, G2, H12
Suggested Citation: Suggested Citation