The Costs of Closing Failed Banks: A Structural Estimation of Regulatory Incentives

Ari Kang; Richard Lowery; Malcolm Wardlaw

doi:10.1093/rfs/hhu076

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The Costs of Closing Failed Banks: A Structural Estimation of Regulatory Incentives

Ari Kang¹; Richard Lowery¹; Malcolm Wardlaw²

¹ The University of Texas at Austin · ² The University of Texas at Dallas

Review of Financial Studies 2015

We estimate a dynamic model of the decision to close a troubled bank. Regulators trade off an aversion to closing banks against the risk that allowing a bank to continue will raise the eventual costs to the deposit insurance fund. Using a conditional choice probability approach, we estimate the costs associated with closing banks, both in direct costs to the insurance fund and in other costs perceived by regulators, either social or personal. We find that delayed closures were driven by a desire to defer costs, an aversion to closing the largest and smallest troubled banks, and political influence.

DOI: 10.1093/rfs/hhu076
Volume: 28 (4)
Pages: 1060-1102
Language: en
Export: BibTeX
Sources: openalex crossref