Fighting Failure: The Persistent Real Effects of Resolving Distressed Banks

61 Pages Posted: 9 Apr 2021

See all articles by Ivan Ivanov

Ivan Ivanov

Board of Governors of the Federal Reserve System

Stephen A. Karolyi

Office of the Comptroller of the Currency

Date Written: April 8, 2021

Abstract

We study the real effects of resolving distressed banks using quasi-experimental variation in resolutions introduced by a threshold-based rule of the FDIC Improvement Act. Our fuzzy regression discontinuity estimates indicate that resolutions lead to reductions in employment and establishments growth of up to six percentage points. These effects are concentrated in small, less urban counties, and translate to large declines in SME lending and increases in corporate bankruptcies. These results imply that large acquiring banks restrict lending to the small business borrowers of distressed 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,

Suggested Citation

Ivanov, Ivan and Karolyi, Stephen A., Fighting Failure: The Persistent Real Effects of Resolving Distressed Banks (April 8, 2021). Available at SSRN: https://ssrn.com/abstract=3822591 or http://dx.doi.org/10.2139/ssrn.3822591

Ivan Ivanov (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Stephen A. Karolyi

Office of the Comptroller of the Currency ( email )

400 7th Street SW
Washington, DC 20219
United States

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