Report

Does going easy on distressed banks help the macroeconomy?

Abstract: During banking crises, regulators often relax their requirements and refrain from closing troubled banks. I estimate the real effects of such regulatory forbearance during the U.S. savings and loan crisis by comparing states' economic outcomes by the amount of forbearance they receive. As instruments, I use historical variation in deposit insurance of similar financial intermediaries (thrifts) and exploit geographic variation in principal supervisory agent (PSA). The evidence suggests a policy-induced real estate boom during forbearance (1982-89), followed by a bigger bust in real estate and real GDP. The relationship does not appear driven by the ex ante size, industry exposure, or systematic cyclicality of a state.

Keywords: financial crises; regulatory policy;

JEL Classification: G01; G2; H12;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2018-01-01

Number: 823

Note: Previous Title: “Does Going Easy on Distressed Banks Help Economic Growth?”