IDEAS home Printed from https://ideas.repec.org/a/fip/fedfer/y2008p17-29.html

The role of relative performance in bank closure decisions

Author

Listed:
  • 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 assetliability ratios fall below a given threshold, and (2) a relative closure rule, which closes banks when their assetliability 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.

Suggested Citation

  • Kenneth Kasa & Mark M. Spiegel, 2008. "The role of relative performance in bank closure decisions," Economic Review, Federal Reserve Bank of San Francisco, pages 17-29.
    • Handle: RePEc:fip:fedfer:y:2008:p:17-29
    as

    Download full text from publisher

    File URL: https://www.frbsf.org/wp-content/uploads/er17-29.pdf
    File Function: Full Text
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

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


    Cited by:

    1. Korte, Josef, 2015. "Catharsis—The real effects of bank insolvency and resolution," Journal of Financial Stability, Elsevier, vol. 16(C), pages 213-231.
    2. Kostic, Natalija & Muthsam, Viktoria & Laux, Christian, 2023. "Accounting Changes and Enforcement of Bank Capital Requirements in a Crisis," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277694, Verein für Socialpolitik / German Economic Association.
    3. Mark M. Spiegel, 1999. "Moral hazard under the Japanese \"convoy\" banking system," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.
    4. Korte, Josef, 2013. "Catharsis - The real effects of bank insolvency and resolution," Discussion Papers 21/2013, Deutsche Bundesbank.
    5. Ignatowski, Magdalena & Korte, Josef, 2014. "Wishful thinking or effective threat? Tightening bank resolution regimes and bank risk-taking," Journal of Financial Stability, Elsevier, vol. 15(C), pages 264-281.
    6. Acharya, Viral & Yorulmazer, Tanju, 2005. "Cash-in-the-Market Pricing and Optimal Bank Bailout Policy," CEPR Discussion Papers 5154, C.E.P.R. Discussion Papers.
    7. Di Nicolo, G. & Gamba, A. & Lucchetta, M., 2011. "Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking," Other publications TiSEM 58ac9f00-92d7-497b-a76f-e, Tilburg University, School of Economics and Management.
    8. Yunzhi Hu & Felipe Varas, 2021. "A Theory of Zombie Lending," Journal of Finance, American Finance Association, vol. 76(4), pages 1813-1867, August.
    9. Luc Can & Mohamed Ariff, 2009. "Performance of East Asian banking sectors under IMF-supported programs," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 14(1), pages 5-26.
    10. Pavlos Almanidis & Robin C. Sickles, 2016. "Banking Crises, Early Warning Models, and Efficiency," International Series in Operations Research & Management Science, in: Juan Aparicio & C. A. Knox Lovell & Jesus T. Pastor (ed.), Advances in Efficiency and Productivity, chapter 0, pages 331-364, Springer.
    11. Cai, Jin, 2022. "Bank herding and systemic risk," Economic Systems, Elsevier, vol. 46(4).
    12. Spiegel, Mark M., 2000. "Bank Charter Value and the Viability of the Japanese Convoy System," Journal of the Japanese and International Economies, Elsevier, vol. 14(3), pages 149-168, September.
    13. Acharya, Viral V. & Yorulmazer, Tanju, 2007. "Too many to fail--An analysis of time-inconsistency in bank closure policies," Journal of Financial Intermediation, Elsevier, vol. 16(1), pages 1-31, January.

    More about this item

    Keywords

    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Federal Reserve Bank of San Francisco Research Library (email available below). General contact details of provider: https://edirc.repec.org/data/frbsfus.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.