Working Paper

Why does the FDIC sue?

Abstract: Cases the Federal Deposit Insurance Corporation (FDIC) pursues against the directors and officers of failed commercial banks for (gross) negligence are important for the corporate governance of U.S. commercial banks. These cases shape the kernel of bank corporate governance, as they guide expectations of bankers and regulators in defining the limits of acceptable behavior under financial distress. We examine the differences in behavior of all 408 U.S. commercial banks that were taken into receivership between 2007?2012. Sued banks had different balance sheet dynamics in the three years prior to failure. These banks were generally larger, faster growing, obtained riskier funding and were more ?optimistic?. We find evidence that the behavior of bank boards adjusts in an out-of-sample set of banks. Our results suggest the FDIC does not only pursue ?deep pockets?, but sets corporate governance standards for all banks by suing negligent directors and officers.

Keywords: Financial stability; corporate governance; bank failures; financial ratios;

JEL Classification: G21; G28; G33; G34;

https://doi.org/10.24149/wp1601

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2016-01-25

Number: 1601