Assessing Regulatory Responses to Banking Crises

63 Pages Posted: 11 May 2022

See all articles by FRB of Kansas City Submitter

FRB of Kansas City Submitter

Federal Reserve Bank of Kansas City

Padma Sharma

Federal Reserve Bank of Kansas City

Date Written: April 28, 2022

Abstract

During banking crises, regulators must decide between bailouts or liquidations, neither of which are publicly popular. A comprehensive assessment of regulators, however, requires examining all their decisions against regulators’ objectives of preserving financial stability while discouraging moral hazard. I develop a Bayesian latent class model to assess regulators on these competing objectives and evaluate banking and savings and loan (S&L) regulators during the 1980’s crises. I find the banking authority (FDIC) conformed to these objectives whereas the S&L regulator (FSLIC), which subsequently became insolvent, deviated from them. Timely interventions based on this evaluation could have redressed the FSLIC’s decision structure and prevented losses to taxpayers.

Keywords: Bank failures, Bank resolution, Bailout, Liquidation, Savings and Loans Crisis, Markov chain Monte Carlo (MCMC), Federal Deposit Insurance Corporation (FDIC), Federal Savings and Loans Insurance Corporation (FSLIC), Bayesian inference, Discrete data analysis, Latent class models

JEL Classification: C11, C38, G21, G33, G38

Suggested Citation

Submitter, FRB of Kansas City and Sharma, Padma, Assessing Regulatory Responses to Banking Crises (April 28, 2022). Available at SSRN: https://ssrn.com/abstract=4105810 or http://dx.doi.org/10.2139/ssrn.4105810

FRB of Kansas City Submitter (Contact Author)

Federal Reserve Bank of Kansas City

1 Memorial Drive
Kansas City, MO 64198
United States

Padma Sharma

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198

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