The Determinants of Bank Failures in Normal and Crisis Times and the Resolution of Failed Banks

This thesis is structured around three empirical analyses, which are based on bank failures that occurred in the US between 1984 and 2013. The first analysis tests whether financial crises contribute to removing the most inefficient banks from the market and to liberating resources for more efficient use (cleansing effect), or whether they destroy banks regardless of their efficiency (scarring effect). The results show that the nature of bank failures during financial crises are not fully aligned with either a cleansing or a scarring effect. While efficiency helps banks survive over the full sample period, financial crises do not amplify the removal of inefficient institutions. Additional tests show that financial crises contribute to producing a scarring effect via the increase in the failure rate of young banks regardless of their efficiency but also generate a cleansing effect by liberating resources that are more efficiently used by new entry banks. The second set of empirical analyses investigates the long-term post-acquisition performance of failed bank acquirers. The results show that after an acquisition failed bank acquirers’ performance deteriorated significantly, with an exception being the deals completed during the global financial crisis, during which no performance changes were evident. This result is likely caused by the loss-sharing agreements included in most of the latter transactions. Further analysis shows that although no benefit in terms of performance materializes for the acquiring banks, they are less likely to disappear from the market through either an acquisition or outright failure. The final analysis examines the relation between failed bank resolution costs and the competitive pressures in the market. The results show that when restrictions on competition are relaxed, large (small) targets become more (less) desirable, and the associated costs to resolve them reduce (increase). This finding, however, is merely evident during normal times