Assessing Regulatory Responses to Banking Crises

Padma Sharma

No RWP 22-04, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: During banking crises, regulators must decide between bailouts or liquidations, neither of which are publicly popular. However, making a comprehensive assessment of regulators requires examining all their decisions against their dual objectives of preserving financial stability and discouraging moral hazard. I develop a Bayesian latent class model to assess regulators on these competing objectives and evaluate banking and savings and loan (S&L) regulators during the 1980s crises. I find that the banking authority (FDIC) conformed to these objectives whereas the S&L regulator (FSLIC), which subsequently became insolvent, deviated from them. Timely interventions based on this evaluation could have redressed the FSLIC’s decision structure and prevented losses to taxpayers.

Keywords: Bank failures; Bank resolution; Bailout; Liquidation; Savings and loans crisis; Markov Chain Monte Carlo (MCMC); Federal Deposit Insurance Corporation; Federal Savings and Loans Insurance Corporation (FSLIC); Bayesian inference; Discrete data analysis; Latent class models (search for similar items in EconPapers)
JEL-codes: C11 C38 G21 G33 G38 (search for similar items in EconPapers)
Pages: 62
Date: 2022-05-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-fdg, nep-ias and nep-reg
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DOI: 10.18651/RWP2022-04

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