Padma Sharma, UC Irvine, is presenting a seminar on “Heterogeneity in the Resolution of Bank Failures: A Latent Class Approach”
Date : December 7, 2017
Time: 4 pm
Venue: Seminar Room 1, IGIDR.
All are invited.
This paper investigates the resolution of failed banks by the FDIC and uncovers a dichotomy in the manner in which cases were administered when bank failures were pervasive as against when they were sporadic. Banks that failed subsequent to unfavorable local economic conditions had a higher median probability of receiving financial assistance from the FDIC compared to those that failed in a relatively more favorable economic climate. The response of the FDIC to bank-level attributes is found to be substantially stronger in the former category of banks relative to the latter group. While these findings corroborate the conclusions of Acharya and Yorulmazer (2007b) regarding the onset of a too-many-to-fail effect, they also bring to light enhanced decision-making processes at the FDIC in the resolution of failed banks during times of industry-wide distress. I develop a novel Bayesian procedure to estimate latent class models with ordinal responses to detect unobserved heterogeneity in bank resolution. I analyze all failures that occurred during 1984-1992 among US banks insured by the FDIC as the regulatory landscape and the spate of regional bank crises during this period created conditions in which bank failures that were crisis-driven and idiosyncratic occurred contemporaneously.