Federal Dposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2009-02
Evidence of Improved Monitoring and Insolvency
Resolution after FDICIA
December 2008
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2009-02
Evidence of Improved Monitoring and Insolvency
Resolution after FDICIA
December 2008
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
1
Evidence of Improved Monitoring and Insolvency Resolution after FDICIA
Edward J. Kane**
Rosalind L. Bennett***
Robert C. Oshinsky***
Abstract
To realign supervisory and market incentives, the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) adjusts two principal features of federal banking
supervision. First, it requires regulators to examine insured institutions more frequently and
makes them accountable for exercising their supervisory powers. Second, the Act empowers
regulators to wind up the affairs of troubled institutions before their accounting net worth is
exhausted.
Using 1984–2003 data on the outcome of individual bank examinations, this paper
documents that the frequency of rating transitions and the character of insolvency resolutions
have changed substantially under FDICIA. The average interval between bank examinations has
dropped for low-rated banks in the post-FDICIA era. Examiner upgrades have become
significantly more likely in the post-FDICIA era even after controlling for the state of the
economy. However, in recessions managers are slower to correct problems that examiners
identify. As a result, during downturns upgrades become less likely and absorptions become
more likely.
Giving the FDIC authority to wind up troubled banks before their tangible net worth is
exhausted has reduced the role of government in the insolvency-resolution process. Consistent
with an hypothesis that FDICIA has improved incentives, our data show that a markedly larger
percentage of troubled banks now search for a merger partner rather than trying to stay in
business until the regulators force them to fail. This greater reliance on quasi-voluntary mergers
is observable both within and across various stages of the business cycle. These findings suggest
that supervisory interventions became more effective at banks during the post-FDICIA era. (JEL
Classifications: G20, G28, G21; Keywords: FDICIA, bank supervision, bank monitoring)
This version: December 8, 2008
* For helpful comments on an earlier draft, the authors wish to than
** Cleary Professor in Finance at Boston College
*** Federal Deposit Insurance Corporation.
The views expressed here are those of the authors and not necessarily those of the FDIC.
Evidence of Improved Monitoring and Insolvency Resolution after FDICIA
Edward J. Kane**
Rosalind L. Bennett***
Robert C. Oshinsky***
Abstract
To realign supervisory and market incentives, the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) adjusts two principal features of federal banking
supervision. First, it requires regulators to examine insured institutions more frequently and
makes them accountable for exercising their supervisory powers. Second, the Act empowers
regulators to wind up the affairs of troubled institutions before their accounting net worth is
exhausted.
Using 1984–2003 data on the outcome of individual bank examinations, this paper
documents that the frequency of rating transitions and the character of insolvency resolutions
have changed substantially under FDICIA. The average interval between bank examinations has
dropped for low-rated banks in the post-FDICIA era. Examiner upgrades have become
significantly more likely in the post-FDICIA era even after controlling for the state of the
economy. However, in recessions managers are slower to correct problems that examiners
identify. As a result, during downturns upgrades become less likely and absorptions become
more likely.
Giving the FDIC authority to wind up troubled banks before their tangible net worth is
exhausted has reduced the role of government in the insolvency-resolution process. Consistent
with an hypothesis that FDICIA has improved incentives, our data show that a markedly larger
percentage of troubled banks now search for a merger partner rather than trying to stay in
business until the regulators force them to fail. This greater reliance on quasi-voluntary mergers
is observable both within and across various stages of the business cycle. These findings suggest
that supervisory interventions became more effective at banks during the post-FDICIA era. (JEL
Classifications: G20, G28, G21; Keywords: FDICIA, bank supervision, bank monitoring)
This version: December 8, 2008
* For helpful comments on an earlier draft, the authors wish to than
** Cleary Professor in Finance at Boston College
*** Federal Deposit Insurance Corporation.
The views expressed here are those of the authors and not necessarily those of the FDIC.