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Resolving Failed Banks: Uncertainty, Multiple Bidding & Auction Design

Author

Listed:
  • Jason Allen

    () (Bank of Canada)

  • Robert Clark

    () (Queen's University)

  • Brent R. Hickman

    () (Olin Business School, University of Washington)

  • Eric Richert

    ()

Abstract

The FDIC resolves insolvent banks using an auction process in which bidding is multidimensional and the rule used to evaluate bids along the different dimensions is proprietary. Uncertainty about the scoring rule leads banks to simultaneously submit multiple differentiated bids. This resolution mechanism typically results in considerable losses for the FDIC—$90 billion during the crisis. Our objective is to see whether the mechanism could be improved. To do so, we propose a methodology for analyzing auction environments where bids are ranked according to multiple attributes chosen by bidders, but where there is uncertainty about the scoring rule used to evaluate the different components of the bids. Using this framework, which extends structural estimation techniques for combinatorial auctions, and FDIC data summarizing bids, we back out the underlying preferences of banks for failed institutions. With these we perform counterfactuals in which we eliminate uncertainty and/or multiple bidding. Our findings suggest that the FDIC could reduce the cost of resolution by around 17% by announcing the scoring rule before bidding begins.

Suggested Citation

  • Jason Allen & Robert Clark & Brent R. Hickman & Eric Richert, 2019. "Resolving Failed Banks: Uncertainty, Multiple Bidding & Auction Design," Working Paper 1422, Economics Department, Queen's University.
  • Handle: RePEc:qed:wpaper:1422
    as

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    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/wpaper/qed_wp_1422.pdf
    File Function: First version 2019
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Failed Banks; Banking Crisis; Regulation; Resolution; Combinatorial Auctions;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • 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
    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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