RWP 22-04, May 2022
During banking crises, regulators must decide between bailouts or liquidations, neither of which are publicly popular. However, making a comprehensive assessment of regulators requires examining all their decisions against their dual objectives of preserving financial stability and discouraging moral hazard. I develop a Bayesian latent class model to assess regulators on these competing objectives and evaluate banking and savings and loan (S&L) regulators during the 1980s crises. I find that the banking authority (FDIC) conformed to these objectives whereas the S&L regulator (FSLIC), which subsequently became insolvent, deviated from them. Timely interventions based on this evaluation could have redressed the FSLIC’s decision structure and prevented losses to taxpayers.
JEL Classifications: C11, C38, G21, G33, G38
Sharma, Padma. 2022. “Assessing Regulatory Responses to Banking Crises.” Federal Reserve Bank of Kansas City, Research Working Paper no. 22-04, May. Available at External Linkhttps://doi.org/10.18651/RWP2022-04