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

Understanding the Components of Bank Failure Resolution Costs

“…We consider this paper the first step in a more comprehensive research approach where the data series can be used as the dependent variable of a multivariate regression. Some of this work is undertaken in Bennett and Unal () who examine how the value of failed bank assets differs across two types of resolution methods. We find on a univariate basis the net loss on assets is lower for a P&A than for a liquidation in both periods of industry health and periods of industry stress.…”

“…Therefore, it is misleading to compare costs between the private‐sector reorganization and the FDIC liquidations without controlling for the selection bias implicit in the resolution process. Bennett and Unal () undertake such a study and find that once they control for selection bias, P&A transactions prove to be costlier during the crisis period of 1986 to1991 than during the non‐crisis period of 1992 to 1997.…”

Understanding the Components of Bank Failure Resolution Costs

“…Therefore, it is misleading to compare costs between the private-sector reorganization and the FDIC liquidations without controlling for the selection bias implicit in the resolution process. Bennett and Unal (2014) undertake such a study and find that once they control for selection bias, P&A transactions prove to be costlier during the crisis period of 1986 to1991 than during the non-crisis period of 1992 to 1997.…”

Creditor recovery: The macroeconomic dependence of industry equilibrium

“…For example, the average recovery rate on securities in the finance sector of 24.6% in Table 1 is largely driven by depressed recoveries in the 2008 crisis period. Similarly, Bennett and Unal (2014) find that resolutions of failed banks (private-sector reorganizations) that occur during periods of bank industry distress result in higher resolution costs than liquidation. And revisiting the 1920s, Ramcharan and Rajan (2014) find that bank failures are associated with reductions in recovery rates on failed assets of nearby banks (by reducing local financing capacity).…”