Resolution Costs and the Business Cycle

Abstract

There are a number of factors that may contribute to the cost of resolving a failed bank. In this paper we study the behavior of the costs of resolving a failed bank as those costs change over the business cycle. We find evidence that the costs are related to the state of the business cycle. Both the contraction and the expansion that preceded it appear to be important in explaining the loss that the FDIC experiences when a bank fails. In addition, a number of other bank-specific variables appear to be linked to loss rates for a failed institution.