Understanding the Components of Bank Failure Resolution Costs

Abstract

In this paper, we demonstrate how the resolution costs associated with over 1,000 bank failures from 1986 to 2007 are distributed across the method of resolution, bank size, regulatory periods, and the existence of fraud. In addition, we document the time spent in the resolution by the resolution method and legislative period. Finally, we show how various classes of claimants against the failed banks bear the costs of the failure.

Government Debt and Banking Fragility: The Spreading of Strategic Uncertainty

“…For now, it is important to stress that the resolution procedure we assume is costly in the sense that a fraction ψ of bank assets are lost if a bank is resolved. This is in line with the empirical evidence in Bennett and Unal (2014) who estimate that around 12% of bank assets are lost in FDIC resolutions. 13 Such resolution costs will be important in motivating the government's willingness to bail out failing banks and keep them operating as 'going concerns'.…”

“…This cost is distinct from the cost of government default and represents the administrative and legal costs of resolving failing banks or the inferior loan management skills of regulators as opposed to private banks. Bennett and Unal (2014) present empirical evidence for the existence of large costs of this nature.…”

The Tail That Wags the Economy: Beliefs and Persistent Stagnation

“…Measured at historical cost, land accounts for less than 5% of total non-residential capital. The observed fluctuations in the value of these assets during 2008-09 are simply too large to be accounted for by land price movements, even if they are sizable.18 This is consistent with the estimates inJames (1991) andBennett and Unal (2015).…”

How Excessive Is Banks’ Maturity Transformation?

“…For instance,Bennett and Unal (2014), using data from bank holding companies resolved in the US by the FDIC from 1986 to 2007, estimate an average discounted total resolution cost to asset ratio of 33.2%, a number compatible with our assumption. See Hardy(2013) for related evidence.…”