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US bank failure and bailout during the financial crisis: Examining the determinants of regulatory intervention decisions

Wenling Lu (Department of Finance and Commercial Law, Western Michigan University, Kalamazoo, Michigan, USA)
David A. Whidbee (Department of Finance and Management Science, Washington State University, Pullman, Washington, USA)

Journal of Financial Economic Policy

ISSN: 1757-6385

Article publication date: 1 August 2016

869

Abstract

Purpose

This paper aims to examine the characteristics of banks that were the target of intervention in the form of bailout or failure during the financial crisis and, of those subjected to intervention, what characteristics distinguish those that received bailout funds from those that were deemed failures.

Design/methodology/approach

The study estimates a series of logit regressions in an effort to identify the causes of regulatory intervention while controlling for bank-level characteristics and the economic and regulatory environment.

Findings

The empirical results indicate that many of the same characteristics associated with banks receiving bailout funds are similar to the characteristics associated with failed banks. However, non-performing loans increased the likelihood of failure, but reduced the likelihood of a bank receiving Capital Purchase Program (CPP) funds, suggesting that regulatory authorities discriminated in their use of CPP funds based on the quality of a bank’s asset portfolio. Further, those banks located in states with limits on de novo branching and those banks that are part of a multi-bank holding company structure were less likely to fail but were more likely to receive CPP funds.

Originality/value

This paper provides a comprehensive analysis of regulatory intervention in the banking industry during the late 2000s financial crisis and the impact of different banking organizational structures, economic circumstances, and financial fragility on the likelihood of a bank failing or receiving bailout funds.

Keywords

Citation

Lu, W. and Whidbee, D.A. (2016), "US bank failure and bailout during the financial crisis: Examining the determinants of regulatory intervention decisions", Journal of Financial Economic Policy, Vol. 8 No. 3, pp. 316-347. https://doi.org/10.1108/JFEP-02-2016-0011

Publisher

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Emerald Group Publishing Limited

Copyright © 2016, Emerald Group Publishing Limited

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