Understanding the Components of Bank Failure Resolution Costs

Bennett, Rosalind L.; Ünal, Haluk

doi:10.2139/ssrn.2482359

Cited by 12 publications

(10 citation statements)

References 12 publications

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“…The recovery rate on banks’ deposits is in line with the average loss of 21 percent on the claim of the Federal Deposit Insurance Corporation (FDIC) in U.S. bank failures over the period between 1986 and 2007, as reported in Bennett and Unal (, p. 378). The FDIC claim subsumes “any deposit claim that was covered by the deposit insurance fund.…”

supporting

confidence: 66%

“…The expected recovery rates for banks compare well to the results of James (), who reports average costs of failure to assets of 40 percent for U.S. bank failures in the mid‐1980s. Bennett and Unal () document somewhat lower costs of failure of 33 percent for U.S. bank failures during the period from 1986 to 2007. We are not aware of a comparable study for multi‐line insurers, life insurers, bond and mortgage insurers, or reinsurers.…”

mentioning

confidence: 99%

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Systemic Risk in Financial Markets: How Systemically Important Are Insurers?

Kaserer¹,

Klein²

2018

J of Risk & Insurance

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This study investigates how insurers contribute to systemic risk in the global financial system. In a modeling framework embracing publicly traded and nonpublic firms, the financial system is represented by 201 major banks and insurers over the period from 2004 through 2014. In the aggregate, the insurance sector contributes relatively little to systemic losses; during the financial crisis and the European sovereign debt crisis, its risk share averaged 9 percent. Individually, however, several multi‐line and life insurers appear to be as systemically risky as the riskiest banks. Our results, therefore, affirm that some insurers are systemically important and indicate that insurers’ level of systemic risk varies by line of business. We discuss several important implications of our results for managing systemic risk in insurance, arguing for a combination of entity‐ and activity‐based regulation.

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supporting

confidence: 66%

mentioning

confidence: 99%

Systemic Risk in Financial Markets: How Systemically Important Are Insurers?

Kaserer¹,

Klein²

2018

J of Risk & Insurance

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“…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 (), who estimate that around 12% of bank assets are lost in Federal Deposit Insurance Corporation resolutions . Such resolution costs will be important in motivating the government's willingness to bail out failing banks and keep them operating as “going concerns.”…”

Section: Frameworksupporting

confidence: 91%

Government Debt and Banking Fragility: The Spreading of Strategic Uncertainty

Cooper

Nikolov

2018

Int Economic Review

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This article studies the interaction of government debt and financial markets. This interaction, termed a “diabolic loop,” is driven by government choice to bail out banks and the resulting incentives for banks to hold government debt instead of self‐insure through equity buffers. We highlight the role of bank equity issuance in determining whether the “diabolic loop” is a Nash equilibrium of the interaction between banks and the government. When equity is issued, no diabolic loop exists. In equilibrium, banks' rational expectations of a bailout ensure that no equity is issued and the sovereign‐bank loop is operative.

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“…We assume a deadweight loss from bank bankruptcies of

η = 5.00 %

of bank assets. Based on a study of bank failures from 1986 to 2007 Bennett and Unal (2015), the FDIC estimates that direct expenses of resolution for failed banks that are liquidated are 4.88% of assets.…”

Section: Calibrationmentioning

confidence: 99%

Financial Fragility with SAM?

Greenwald¹,

Landvoigt²,

Nieuwerburgh

2020

The Journal of Finance

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Shared appreciation mortgages (SAMs) feature mortgage payments that adjust with house prices. They are designed to stave off borrower default by providing payment relief when house prices fall. Some argue that SAMs may help prevent the next foreclosure crisis. However, home owners' gains from payment relief are mortgage lenders' losses. A general equilibrium model in which financial intermediaries channel savings from saver to borrower households shows that indexation of mortgage payments to aggregate house prices increases financial fragility, reduces risk‐sharing, and leads to expensive financial sector bailouts. In contrast, indexation to local house prices reduces financial fragility and improves risk‐sharing.

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Understanding the Components of Bank Failure Resolution Costs

Cited by 12 publications

References 12 publications

Systemic Risk in Financial Markets: How Systemically Important Are Insurers?

Systemic Risk in Financial Markets: How Systemically Important Are Insurers?

Government Debt and Banking Fragility: The Spreading of Strategic Uncertainty

Financial Fragility with SAM?

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