Are Banks Really Special? New Evidence from the FDIC-Induced Failure of Healthy Banks

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Are Banks Really Special? New Evidence from the FDIC-Induced Failure of Healthy Banks

December 2003 Number 176

JEL classification: E5, G18, G33

Author: Adam B. Ashcraft

The FDIC used cross-guarantees to close thirty-eight subsidiaries of First Republic Bank Corporation in 1988 and eighteen subsidiaries of First City Bancorporation in 1992 when lead banks from each of these Texas-based bank holding companies were declared insolvent. I use this exogenous failure of otherwise healthy subsidiary banks as a natural experiment for studying the impact of bank failure on local-area real economic activity. I find that the closings of the subsidiaries were associated with a significant decline in bank lending that led to a permanent reduction in real county income of about 3 percent.

Available only in PDF PDF

45 pages / 619 kb

For a published version of this report, see Adam B. Ashcraft, "Are Banks Really Special? New Evidence from the FDIC-Induced Failure of Healthy Banks," American Economic Review 95, no. 5 (December 2005): 1712-30.

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