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Does going easy on distressed banks help the macroeconomy?

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  • Sean Hundtofte

Abstract

During banking crises, regulators often relax their requirements and refrain from closing troubled banks. I estimate the real effects of such regulatory forbearance during the U.S. savings and loan crisis by comparing states' economic outcomes by the amount of forbearance they receive. As instruments, I use historical variation in deposit insurance of similar financial intermediaries (thrifts) and exploit geographic variation in principal supervisory agent (PSA). The evidence suggests a policy-induced real estate boom during forbearance (1982-89), followed by a bigger bust in real estate and real GDP. The relationship does not appear driven by the ex ante size, industry exposure, or systematic cyclicality of a state.

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  • Sean Hundtofte, 2017. "Does going easy on distressed banks help the macroeconomy?," Staff Reports 823, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:823
    Note: Previous Title: “Does Going Easy on Distressed Banks Help Economic Growth?”
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    More about this item

    Keywords

    financial crises; regulatory policy;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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