Fighting Failure: The Persistent Real Effects of Resolving Distressed Banks

Abstract

We estimate the real effects of resolving distressed banks using quasi-experimental variation in resolutions introduced by a threshold-based rule of the FDIC Improvement Act. We find that resolutions reduce employment and establishments growth by up to six percentage points. These effects are persistent and driven by small, less urban counties with concentrated banking markets and bank-dependent industries. Resolutions also significantly decrease SME lending, consistent a bank lending channel in which large out-of-market acquirers ration credit to the small business borrowers of target banks. Overall, current bank resolution policy may have costly externalities for local economic activity.

Keywords: bank resolutions, the real economy, the bank lending channel

JEL Classification: G01, G21, G28,