Resolution Costs and the Business Cycle
Working Paper 2004-01
March 2004
Kathleen McDill
Senior Financial Economist
Division of Insurance and Research
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Phone: 202-898-3705
Fax: 202-898-8636
E- mail: kmcdill@fdic.gov
The views stated here are those of the author and do not necessarily reflect those of the Federal
Deposit Insurance Corporation. I would like to thank Lynn Shibut, Dan N uxoll, Rosalind
Bennett, John O’Keefe, Andrew Davenport and Haluk Unal for their many helpful comments.
Working Paper 2004-01
March 2004
Kathleen McDill
Senior Financial Economist
Division of Insurance and Research
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Phone: 202-898-3705
Fax: 202-898-8636
E- mail: kmcdill@fdic.gov
The views stated here are those of the author and do not necessarily reflect those of the Federal
Deposit Insurance Corporation. I would like to thank Lynn Shibut, Dan N uxoll, Rosalind
Bennett, John O’Keefe, Andrew Davenport and Haluk Unal for their many helpful comments.
2
Abstract
There are a number of factors that may contribute to the cost of resolving a failed bank. In
this paper we study the behavior of the costs of resolving a failed bank as those costs
change over the business cycle. We find evidence that the costs are related to the state of
the business cycle. Both the contraction and the expansion that preceded it appear to be
important in explaining the loss that the FDIC experiences when a bank fails. In addition, a
number of other bank-specific variables appear to be linked to loss rates for a failed
institution.
Abstract
There are a number of factors that may contribute to the cost of resolving a failed bank. In
this paper we study the behavior of the costs of resolving a failed bank as those costs
change over the business cycle. We find evidence that the costs are related to the state of
the business cycle. Both the contraction and the expansion that preceded it appear to be
important in explaining the loss that the FDIC experiences when a bank fails. In addition, a
number of other bank-specific variables appear to be linked to loss rates for a failed
institution.