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Selling Failed Banks
Author(s) -
GRANJA JOÃO,
MATVOS GREGOR,
SERU AMIT
Publication year - 2017
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12512
Subject(s) - capitalization , common value auction , business , wedge (geometry) , finance , monetary economics , financial system , economics , microeconomics , philosophy , linguistics , physics , optics
The average FDIC loss from selling a failed bank is 28% of assets. We document that failed banks are predominantly sold to bidders within the same county, with similar assets business lines, when these bidders are well capitalized. Otherwise, they are acquired by less similar banks located further away. We interpret these facts within a model of auctions with budget constraints, in which poor capitalization of some potential acquirers drives a wedge between their willingness and ability to pay for failed banks. We document that this wedge drives misallocation, and partially explains the FDIC losses from failed bank sales.