The Role of Relative Performance in Bank ... - Above Top Secret

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26 FRBSF Economic Review 2008Table 5Logit Analysis Results: Small Banks Excluded, 1992–1997Dependent Variable: FAILAbsolute Relative Absolute Relative Absolute RelativeVariables closure rule closure rule closure rule closure rule closure rule closure rule(1) (2) (3) (4) (5) (6)A ijt –42.96** –73.25** –43.25** –74.18** –35.14** –71.76**(4.27) (4.88) (4.26) (4.89) (4.81) (5.39)A jt 53.44** 54.26** 50.95**(3.68) (3.70) (4.01)SIZE –2.75E–7 –4.63E–7 –2.68E–7 –4.14E–7(2.16E–7) (2.64E–7) (2.17E–7) (2.67E–7)D92 41.36** 14.90** 41.78** 15.18** 31.24** 14.47**(4.55) (1.50) (4.53) (1.50) (5.20) (1.61)D93 40.45** 13.84** 40.87** 14.13** 30.23** 13.36**(4.61) (1.53) (4.59) (1.54) (5.25) (1.64)D94 40.25** 13.89** 40.67** 14.15** 30.06** 13.36**(4.62) (1.58) (4.61) (1.58) (5.26) (1.68)D95 39.11** 12.49** 39.55** 12.78** 28.68** 11.82**(4.68) (1.69) (4.66) (1.69) (5.34) (1.80)COMMERCIAL 5.56** 4.87**(1.37) (1.56)AGRICULTURAL –0.93 1.66(4.01) (3.87)REALESTATE 1.31 1.26(0.99) (1.02)NON-INTEREST 6.15 6.55(5.32) (5.63)CD 4.22** 4.78*(1.76) (2.02)90DAYSLATE 30.83** 12.82(8.93) (10.06)DiagnosticsAIC 728.17 581.94 726.18 576.29 695.30 564.79Schwartz 769.90 632.02 776.25 634.72 795.45 673.30–2 log-likelihood 718.17 569.94 714.18 562.29 671.30 538.79# observations 31,143 31,143 31,143 31,143 31,143 31,143Pseduo R 2 classification .277 .426 .281 .434 .324 .458Type I error 61/66 59/66 61/66 56/66 60/66 55/66Type II error 0 3 0 9 2 3Total correct 99.8% 99.8% 99.8% 99.8% 99.8% 99.8%Notes: Analysis excludes banks with total assets below $50 million at any time during the sample period. * and ** indicate Wald chi-squared statistical significance at5-percent and 1-percent levels, respectively. Time dummies for years 1992 through 1995 were included in the specification. Dummy coefficient estimates are availableupon request from authors. Type II error figure represents the number of non-events incorrectly designated as events.Finally, the conditioning variables perform similarly tothe results for the entire sample. There is again little evidencethat bank size is a useful predictor of bank closure. Banksize fails to enter significantly, and both specifications appearto be insensitive to its inclusion. Among the other conditioningvariables, the COMMERCIAL ijt and CD ijt variablesare again robustly significant, while the AGRICULTURE ijt,and NON-INTERESTijt variables again fail to enter significantly.The notable changes are in the REALESTATE ijt and90DAYSLATEijt variables, which now fail to enter significantlyunder the relative closure rule specification (model 6).This discrepancy probably reflects some degree of collinearitybetween these variables, which provide information aboutloan quality and a bank’s relative performance.
Kasa and Spiegel / The Role of Relative Performance in Bank Closure Decisions 27Our empirical results give a strong indication that U.S.regulators considered relative performance in their closuredecisions during the post-FDICIA period. This finding isconsistent with the desirable policy in the theoretical modelabove. 19 Moreover, the results are robust to the inclusion ofthe conditioning variables we consider, as well as the exclusionof small banks from the sample.4. ConclusionThis paper examines the role of relative performance in bankclosure decisions. We show that when banks are subject tocommon shocks, a closure rule that incorporates relative performancewill be less costly than one based solely on absoluteperformance. Our empirical results provide robust#iAppendixProof of Proposition 1Under the absolute closure rule in equation (4),(13) f )= m -n i - i)f , we require the pa-)evidence that relative performance ^1+ Chas nh< indeed 1- been F^ mconsid--ni- ihg] igdiF= Vn- ] m+CgE7f] f gA.ered in bank closure decisions in the United States during theipost-FDICIA period.As we note earlier, neither the relative performance ruleTo ensure an interior solution forrameter restrictionnor the absolute performance rule is time consistent in astatic one-shot game. Instead, a regulator whose loss functionsolely involves minimizing expected taxpayer liability wouldalways choose prompt closure when regulatory rules allowmax_i < m 0,since f ^ -npi -ih< 1 and E 7 F ^-npi -ihA> 0. As discussedin the text, this is the standard moral hazard resultwith limited liability: Since its losses are bounded from be-
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