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Why does the FDIC sue?

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  • Christoffer Koch
  • Ken Okamura

Abstract

Cases the Federal Deposit Insurance Corporation (FDIC) pursues against the directors and officers of failed commercial banks for (gross) negligence are important for the corporate governance of U.S. commercial banks. These cases shape the kernel of bank corporate governance, as they guide expectations of bankers and regulators in defining the limits of acceptable behavior under financial distress. We examine the differences in behavior of all 408 U.S. commercial banks that were taken into receivership between 2007?2012. Sued banks had different balance sheet dynamics in the three years prior to failure. These banks were generally larger, faster growing, obtained riskier funding and were more ?optimistic?. We find evidence that the behavior of bank boards adjusts in an out-of-sample set of banks. Our results suggest the FDIC does not only pursue ?deep pockets?, but sets corporate governance standards for all banks by suing negligent directors and officers.

Suggested Citation

  • Christoffer Koch & Ken Okamura, 2016. "Why does the FDIC sue?," Working Papers 1601, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:1601
    DOI: 10.24149/wp1601
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    More about this item

    Keywords

    Financial stability; corporate governance; bank failures; financial ratios;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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