The Relation Between Bank Resolutions and Information Environment: Evidence from the Auctions for Failed Banks

Authors

  • JOÃO GRANJA

    1. Sloan School of Management, Massachusetts Institute of Technology
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    • Sloan School of Management, Massachusetts Institute of Technology. Accepted by Philip Berger. I thank Ray Ball, Robert Bushman, Hans Christensen, Bob DeYoung, Alon Kalay, Doug Skinner, Abbie Smith, James Vickery (discussant), John Wilson (discussant), the participants in the 2011 Transatlantic Doctoral Conference, 2011 IFABS conference, and the 2012 JAR/FRBNY conference for the insightful comments and discussion. Special thanks go to Joseph Gerakos, Christian Leuz, and Haresh Sapra for their support throughout this project. Research support from the Sanford J. Grossman Fellowship in Honor of Arnold Zellner is gratefully acknowledged; any opinions expressed herein are the author's and not necessarily those of Sanford J. Grossman or Arnold Zellner. I also acknowledge the generous financial support provided by the Deloitte Foundation Fellowship program. An online appendix is available for download here: http://research.chicagobooth.edu/arc/journal/onlineappendices.aspx.


ABSTRACT

This study examines the impact of disclosure requirements on the resolution costs of failed banks. Consistent with the hypothesis that disclosure requirements mitigate information asymmetries in the auctions for failed banks, I find that, when failed banks are subject to more comprehensive disclosure requirements, regulators incur lower costs of closing a bank and retain a lower portion of the failed bank's assets, while bidders that are geographically more distant are more likely to participate in the bidding for the failed bank. The paper provides new insights into the relation between disclosure and the reorganization of a banking system when the regulators' preferred plan of action is to promote the acquisition of undercapitalized banks by healthy ones. The results suggest that disclosure regulation policy influences the cost of resolution of a bank and, as a result, could be an important factor in the definition of the optimal resolution strategy during a banking crisis event.

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