Working Paper Series
The Effects of Resolution Methods
and Industry Stress on the Loss on
Assets from Bank Failures
Published in the Journal of Financial Stability 15, (2014): 18-31.
Rosalind L. Bennett
Federal Deposit Insurance Corporation
Haluk Unal
University of Maryland, R.H. Smith School
of Business and FDIC Center for
Financial Research
First Version: November 2009
Current Version: July 2014
FDIC CFR WP 2009-11
NOTE: This paper was previously circulated under the title “The Cost Effectiveness of Private Sector
Reorganizations of Failed Banks”. Staff working papers are preliminary materials circulated to stimulate
discussion and critical comment. The analysis, conclusions, and opinions set forth here are those of the
author(s) alone and do not necessarily reflect the views of the Federal Deposit Insurance Corporation.
References in publications to this paper (other than acknowledgment) should be cleared with the author(s)
to protect the tentative character of these papers.
The Effects of Resolution Methods
and Industry Stress on the Loss on
Assets from Bank Failures
Published in the Journal of Financial Stability 15, (2014): 18-31.
Rosalind L. Bennett
Federal Deposit Insurance Corporation
Haluk Unal
University of Maryland, R.H. Smith School
of Business and FDIC Center for
Financial Research
First Version: November 2009
Current Version: July 2014
FDIC CFR WP 2009-11
NOTE: This paper was previously circulated under the title “The Cost Effectiveness of Private Sector
Reorganizations of Failed Banks”. Staff working papers are preliminary materials circulated to stimulate
discussion and critical comment. The analysis, conclusions, and opinions set forth here are those of the
author(s) alone and do not necessarily reflect the views of the Federal Deposit Insurance Corporation.
References in publications to this paper (other than acknowledgment) should be cleared with the author(s)
to protect the tentative character of these papers.
1
The Effects of Resolution Methods and Industry Stress
on the Loss on Assets from Bank Failures1
Rosalind L. Bennett
FDIC Division of Insurance and Research
Haluk Unal
Smith School of Business, University of Maryland and FDIC CFR
June 2014
ABSTRACT
In this paper, we examine how the value of failed bank assets differs between two types
of FDIC resolution methods: liquidation and private-sector reorganization. Our findings
show that private-sector reorganizations do not deliver the expected cost-savings from
1986 to 1991, a period of industry distress. On a univariate basis, the net loss on assets is
lower for a private-sector reorganization than for a liquidation in both a period of industry
distress and of industry health. However, institutions with higher quality assets and
higher franchise values are more likely to be resolved using a private-sector resolution.
Once we control for this selection bias, we find that institutions that are resolved during
periods of industry distress result in higher resolution costs than liquidation. During
periods of industry health, private-sector resolutions are less costly than liquidations. We
show that if a bank that failed during the post-crisis period instead failed during the crisis
period, its net loss as a percent of assets would have been 3.232 percentage points higher.
Given that the average net loss on assets ratio is 21.42 percent during our sample period
from 1986 to 2007, the increase in costs is economically significant.
JEL Classifications: G21, G28, G33
Keywords: bank failures, bank resolution costs, FDIC receivership, fire sales, banking
crises
Opinions expressed in this paper are those of authors’
and not necessarily those of the FDIC.
1 Contact information: rbennett@fdic.gov and hunal@rhsmith.umd.edu. We are grateful to Art Murton for
his guidance and extensive input throughout this project. We also thank Karen Flynn for letting us share her
expertise of the FDIC accounting system and Lynn Shibut for answering many questions, Philip Shively
for his contribution in the early stages of the project, and Abhinav Kapur and Disha Shah for their research
assistance. We greatly appreciate constructive comments and suggestions from two anonymous referees
and Ifthekar Hasan (the editor), Michael Faulkender, Mitchell Glassman, Gerald Hoberg, Edward Kane,
Paul Kupiec, Myron Kwast, James Marino, and Jack Reidhill as well as comments received at the 2010
annual meetings of the Financial Management Association, seminar participants at the FDIC, the Board of
Governors of the Federal Reserve, the Federal Reserve Bank of New York and the Federal Reserve Bank of
San Francisco. Naturally, we assume responsibility for any errors.
The Effects of Resolution Methods and Industry Stress
on the Loss on Assets from Bank Failures1
Rosalind L. Bennett
FDIC Division of Insurance and Research
Haluk Unal
Smith School of Business, University of Maryland and FDIC CFR
June 2014
ABSTRACT
In this paper, we examine how the value of failed bank assets differs between two types
of FDIC resolution methods: liquidation and private-sector reorganization. Our findings
show that private-sector reorganizations do not deliver the expected cost-savings from
1986 to 1991, a period of industry distress. On a univariate basis, the net loss on assets is
lower for a private-sector reorganization than for a liquidation in both a period of industry
distress and of industry health. However, institutions with higher quality assets and
higher franchise values are more likely to be resolved using a private-sector resolution.
Once we control for this selection bias, we find that institutions that are resolved during
periods of industry distress result in higher resolution costs than liquidation. During
periods of industry health, private-sector resolutions are less costly than liquidations. We
show that if a bank that failed during the post-crisis period instead failed during the crisis
period, its net loss as a percent of assets would have been 3.232 percentage points higher.
Given that the average net loss on assets ratio is 21.42 percent during our sample period
from 1986 to 2007, the increase in costs is economically significant.
JEL Classifications: G21, G28, G33
Keywords: bank failures, bank resolution costs, FDIC receivership, fire sales, banking
crises
Opinions expressed in this paper are those of authors’
and not necessarily those of the FDIC.
1 Contact information: rbennett@fdic.gov and hunal@rhsmith.umd.edu. We are grateful to Art Murton for
his guidance and extensive input throughout this project. We also thank Karen Flynn for letting us share her
expertise of the FDIC accounting system and Lynn Shibut for answering many questions, Philip Shively
for his contribution in the early stages of the project, and Abhinav Kapur and Disha Shah for their research
assistance. We greatly appreciate constructive comments and suggestions from two anonymous referees
and Ifthekar Hasan (the editor), Michael Faulkender, Mitchell Glassman, Gerald Hoberg, Edward Kane,
Paul Kupiec, Myron Kwast, James Marino, and Jack Reidhill as well as comments received at the 2010
annual meetings of the Financial Management Association, seminar participants at the FDIC, the Board of
Governors of the Federal Reserve, the Federal Reserve Bank of New York and the Federal Reserve Bank of
San Francisco. Naturally, we assume responsibility for any errors.