Advanced Search
MyIDEAS: Login to save this article or follow this journal

The role of relative performance in bank closure decisions

Contents:

Author Info

  • Kenneth Kasa
  • Mark M. Spiegel

Abstract

This paper studies a banking industry subject to common and idiosyncratic shocks. We compare two types of regulatory closure rules: (1) an “absolute closure rule,” which closes banks when their asset–liability ratios fall below a given threshold, and (2) a “relative closure rule,” which closes banks when their asset–liability ratios fall sufficiently below the industry average. There are two main results: First, relative closure rules imply forbearance during “bad times,” defined as adverse realizations of the common shock. This forbearance occurs for incentive reasons, not because of irreversibilities or political economy considerations. Second, relative closure rules are less costly to taxpayers, and these savings increase with the relative variance of the common shock. To evaluate the model, we estimate a panel-logit regression using a sample of U.S. commercial banks. We find strong evidence that U.S. bank closures are based on relative performance. Individual and average asset-liability ratios are both significant predictors of bank closure.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.frbsf.org/economic-research/publications/economic-review/2008/er17-29.pdf
Download Restriction: no

Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (2008)
Issue (Month): ()
Pages: 17-29

as in new window
Handle: RePEc:fip:fedfer:y:2008:p:17-29

Contact details of provider:
Postal: P.O. Box 7702, San Francisco, CA 94120-7702
Phone: (415) 974-2000
Fax: (415) 974-3333
Email:
Web page: http://www.frbsf.org/
More information through EDIRC

Order Information:
Email:

Related research

Keywords: Bank failures ; Problem banks;

Other versions of this item:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Giammarino, Ronald M & Lewis, Tracy R & Sappington, David E M, 1993. " An Incentive Approach to Banking Regulation," Journal of Finance, American Finance Association, vol. 48(4), pages 1523-42, September.
  2. Nagarajan, S. & Sealey, C.W., 1993. "Forbearance, Deposit Insurance Pricing, and Incentive Compatible Bank Regulation," Papers 93-05, Columbia - Graduate School of Business.
  3. Nagarajan, S. & Sealey, C. W., 1998. "State-contingent regulatory mechanisms and fairly priced deposit insurance," Journal of Banking & Finance, Elsevier, vol. 22(9), pages 1139-1156, September.
  4. Fries,S. & Mella-Barral,P. & Perraudin,W.R.M., 1995. "Optimal Bank Reorganisation and the Fair Pricing of Deposit Garantees," Cambridge Working Papers in Economics 9417, Faculty of Economics, University of Cambridge.
  5. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  6. Mark E. Levonian, 1991. "What happens if banks are closed "early"?," Proceedings 321, Federal Reserve Bank of Chicago.
  7. Mailath George J. & Mester Loretta J., 1994. "A Positive Analysis of Bank Closure," Journal of Financial Intermediation, Elsevier, vol. 3(3), pages 272-299, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. De Nicolò, Gianni & Gamba, Andrea & Luccetta, Marcella, 2012. "Capital regulation, liquidity requirements and taxation in a dynamic model of banking," Discussion Papers 10/2012, Deutsche Bundesbank, Research Centre.
  2. Spiegel, M.M., 1999. "Bank Chapter Value and the Viability of the Japanese Convoy System," Papers pb99-06, Economisch Institut voor het Midden en Kleinbedrijf-.
  3. Acharya, Viral V & Yorulmazer, Tanju, 2005. "Cash-in-the-Market Pricing and Optimal Bank Bailout Policy," CEPR Discussion Papers 5154, C.E.P.R. Discussion Papers.
  4. Mark M. Spiegel, 1999. "Moral hazard under the Japanese "convoy" banking system," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fedfer:y:2008:p:17-29. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.