Selling Failed Banks

Joao Granja, Gregor Matvos and Amit Seru
Additional contact information
Joao Granja: MIT
Gregor Matvos: University of Chicago

Research Papers from Stanford University, Graduate School of Business

Abstract: We show that the allocation of failed banks in the Great Recession was likely distorted because potential acquirers of these banks were poorly capitalized. We illustrate this phenomenon within a model of auctions with budget constraints. In our model poor capitalization of some potential acquirers drives a wedge between their willingness to pay and the ability to pay for a failed bank. Using our framework, we infer three characteristics that drive potential acquirers' willingness to pay for a failed bank in the data: geographic proximity, bank specialization, and increased market concentration. Consistent with predictions of our model, we find that low capitalization of potential acquirers decreases their ability to acquire a failed bank. Finally, we show that the wedge between potential acquirers' willingness and ability to pay distorts the allocation of failed banks. The costs of this misallocation are substantial, as measured by the additional resolution costs of the FDIC. These findings have direct implications for the design of the bank resolution process.

JEL-codes: E65 G18 G21 (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-ban and nep-mac
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Selling Failed Banks (2017)
Working Paper: Selling Failed Banks (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3461

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