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The effects of resolution methods and industry stress on the loss on assets from bank failures

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  • Bennett, Rosalind L.
  • Unal, Haluk

Abstract

In this paper, we examine how the value of failed bank assets differs between two types of FDIC resolution methods: liquidation and private-sector reorganization. Our findings show that private-sector reorganizations do not deliver the expected cost-savings from 1986 to 1991, a period of industry distress. On a univariate basis, the net loss on assets is lower for a private-sector reorganization than for a liquidation in both a period of industry distress and of industry health. However, institutions with higher quality assets and higher franchise values are more likely to be resolved using a private-sector resolution. Once we control for this selection bias, we find that institutions that are resolved during periods of industry distress result in higher resolution costs than liquidation. During periods of industry health, private-sector resolutions are less costly than liquidations. We show that if a bank that failed during the post-crisis period instead failed during the crisis period, its net loss as a percent of assets would have been 3.232 percentage points higher. Given that the average net loss on assets ratio is 21.42 percent during our sample period from 1986 to 2007, the increase in costs is economically significant.

Suggested Citation

  • Bennett, Rosalind L. & Unal, Haluk, 2014. "The effects of resolution methods and industry stress on the loss on assets from bank failures," Journal of Financial Stability, Elsevier, vol. 15(C), pages 18-31.
    • Handle: RePEc:eee:finsta:v:15:y:2014:i:c:p:18-31
    DOI: 10.1016/j.jfs.2014.06.007
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    7. Lawrence J. White, 2015. "When Time is Not on Our Side: The Costs of Regulatory Forbearance in the Closure of Insolvent Banks," Working Papers 15-05, New York University, Leonard N. Stern School of Business, Department of Economics.
    8. Balla, Eliana & Mazur, Laurel C. & Prescott, Edward Simpson & Walter, John R., 2019. "A comparison of community bank failures and FDIC losses in the 1986–92 and 2007–13 banking crises," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 1-15.
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    14. Mora, Nada, 2015. "Creditor recovery: The macroeconomic dependence of industry equilibrium," Journal of Financial Stability, Elsevier, vol. 18(C), pages 172-186.
    15. Eliana Balla & Edward Simpson Prescott & John R. Walter, 2015. "Did the Financial Reforms of the Early 1990s Fail? A Comparison of Bank Failures and FDIC Losses in the 1986-92 and 2007-13 Periods," Working Paper 15-5, Federal Reserve Bank of Richmond.
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    More about this item

    Keywords

    Bank failures; Bank resolution costs; FDIC receivership; Fire sales; Banking crises;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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