What happened to all those banks that failed in the crisis? — João Granja

MIT Sloan Assistant Professor João Granja

MIT Sloan Assistant Professor João Granja

From The Conversation

During the financial crisis and its aftermath, the Federal Deposit Insurance Corporation (FDIC) sold nearly 500 failed banks in the United States.

These hurried sales of institutions seized by the agency reverberated throughout local and regional economies and had serious consequences nationally. The FDIC lost US$90 billion in the deals, and at the height of the crisis in 2009, the agency’s deposit insurance fund was $21 billion underwater.

I have been exploring this extraordinary episode in US banking history with two other researchers, Gregor Matvos and Amit Seru, both of the University of Chicago. We wanted to find out what happened to banks when they were sold, who bought them and why, and what the implications might be for public policy. To do this, we compiled information on all FDIC bank sales from 2007 to 2013 and analyzed the data using probability models and other methods.

More broadly, our study focused on understanding the nature and efficiency of allocation outcomes when failed assets are sold. These findings have direct implications for the design of the bank resolution process – how to deal with the death of a financial firm – an issue that is confronting policymakers and researchers both in the US and the EU.

In this study, we tried to understand the costs associated with failed bank sales in the US. We hope that these facts will help policymakers to weigh the costs of selling banks against the costs of supporting them outright during future financial crises. Understanding these trade-offs should help policymakers reduce the taxpayer costs associated with reorganizing a banking system in distress.

Read the full post at The Conversation

João Granja is an Assistant Professor of Accounting at the MIT Sloan School of Management.

Regulating today’s modern banking system — João Granja

MIT Sloan Assistant Professor João Granja

MIT Sloan Asst. Prof João Granja

Years after a devastating crisis that spread from the U.S. across Europe and Asia, policymakers all over the world are still trying to come up with strategies to make sure that a financial crisis of that magnitude never happens again. One essential element of this task is building back the trust of the public.

When the every day participants in the financial system—the depositors, holders of short-term commercial paper of banks, and other bank investors—feel confident in the banks, the financial system stabilizes. Business runs more smoothly. And growth improves.

In the U.S. our faith in banks is abysmally low. According to a Gallop poll conducted in June, Americans’ confidence in U.S. banks stands at 26%, up from the record low of 21% a year ago. The percentage of Americans saying they have “a great deal” or “quite a lot” of confidence in U.S. banks remains well below its pre-recession level of 41%, measured in June 2007. Meanwhile, across the pond, only 19% of Britons say that banks are well managed, according to the British Social Attitudes Report released in September.

Perhaps the simplest way to instill confidence in the public is transparency. That is: to compel banks to provide full and complete balance sheet information. They must disclose more detailed information to the public on their holdings of securities, government bonds, commercial real estate, and commercial paper; they must reveal their amounts of equity and capital; and they should be more forthcoming about outstanding loans and other liabilities. There should be no such thing as “off balance sheet” assets.

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