Does Going Easy on Distressed Banks Help the Macroeconomy?

50 Pages Posted: 5 Oct 2017 Last revised: 12 Jul 2018

See all articles by Sean Hundtofte

Sean Hundtofte

Federal Reserve Bank of New York; Yale University, School of Management

Date Written: January 1, 2018

Abstract

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

Hundtofte, C. Sean, Does Going Easy on Distressed Banks Help the Macroeconomy? (January 1, 2018). FRB of NY Staff Report No. 823. Available at SSRN: https://ssrn.com/abstract=3048226

C. Sean Hundtofte (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Yale University, School of Management ( email )

New Haven, CT
United States

HOME PAGE: http://www.seanhundtofte.com

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