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Are banks really special? New evidence from the FDIC-induced failure of healthy banks

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  • Adam B. Ashcraft

Abstract

The FDIC used cross-guarantees to close thirty-eight subsidiaries of First Republic Bank Corporation in 1988 and eighteen subsidiaries of First City Bancorporation in 1992 when lead banks from each of these Texas-based bank holding companies were declared insolvent. I use this exogenous failure of otherwise healthy subsidiary banks as a natural experiment for studying the impact of bank failure on local-area real economic activity. I find that the closings of the subsidiaries were associated with a significant decline in bank lending that led to a permanent reduction in real county income of about 3 percent.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 176.

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Date of creation: 2003
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Handle: RePEc:fip:fednsr:176

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Keywords: Bank failures ; Local finance ; Subsidiary corporations ; Bank loans ; Income ; Federal Deposit Insurance Corporation;

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  1. Robert T. Clair, Gerald P. O'Driscoll, Jr., and Kevin J. Yeats, 1994. "Is Banking Different? A Reexamination of the Case for Regulation," Cato Journal, Cato Journal, Cato Institute, vol. 13(3), pages 345-365, Winter.
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  6. Hugh Rockoff, 1993. "The Meaning of Money in the Great Depression," NBER Historical Working Papers 0052, National Bureau of Economic Research, Inc.
  7. Eric S. Rosengren & Joe Peek, 2000. "Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States," American Economic Review, American Economic Association, vol. 90(1), pages 30-45, March.
  8. Christopher James & David C. Smith, 2000. "Are Banks Still Special? New Evidence on Their Role in the Corporate Capital-Raising Process," Journal of Applied Corporate Finance, Morgan Stanley, vol. 13(1), pages 52-63.
  9. Charles W. Calomiris & Joseph R. Mason, 2003. "Consequences of Bank Distress During the Great Depression," American Economic Review, American Economic Association, vol. 93(3), pages 937-947, June.
  10. Slovin, Myron B & Sushka, Marie E & Polonchek, John A, 1993. " The Value of Bank Durability: Borrowers as Bank Stakeholders," Journal of Finance, American Finance Association, vol. 48(1), pages 247-66, March.
  11. Adam B. Ashcraft, 2001. "New evidence on the lending channel," Staff Reports 136, Federal Reserve Bank of New York.
  12. Driscoll, John C., 2004. "Does bank lending affect output? Evidence from the U.S. states," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 451-471, April.
  13. Murillo Campello, 2002. "Internal Capital Markets in Financial Conglomerates: Evidence from Small Bank Responses to Monetary Policy," Journal of Finance, American Finance Association, vol. 57(6), pages 2773-2805, December.
  14. Morgan, Donald P, 1998. "The Credit Effects of Monetary Policy: Evidence Using Loan Commitments," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(1), pages 102-18, February.
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