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Resolving Failed Banks: Uncertainty, Multiple Bidding & Auction Design

Author

Listed:
  • Jason Allen
  • Robert Clark
  • Brent Hickman
  • Eric Richert
Abstract
Bank resolution is costly. In the United States, the Federal Deposit Insurance Corporation (FDIC) typically resolves failing banks by auction. If a bank is failing, healthy banks are encouraged to compete at auction to buy it. This results in a cash transfer from the FDIC to the buyer; the failing bank then continues under new ownership. The FDIC tries to minimize these transfers by holding competitive auctions. The main feature of these auctions is that they are scoring auctions. First, healthy banks place bids that can differ along multiple dimensions. These are scored based on their estimated costs. Second, to foster competition, bidders are encouraged to submit multiple bids, even though only one bid can win. This paper proposes a methodology for analyzing auction environments where bids are ranked according to multiple attributes but there is uncertainty about the scoring rule used to evaluate them. We use this framework to estimate the cost to the FDIC of having an opaque scoring rule. We find that the FDIC could reduce costs of resolution by around 17 percent by removing uncertainty.

Suggested Citation

  • Jason Allen & Robert Clark & Brent Hickman & Eric Richert, 2019. "Resolving Failed Banks: Uncertainty, Multiple Bidding & Auction Design," Staff Working Papers 19-30, Bank of Canada.
    • Handle: RePEc:bca:bocawp:19-30
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    References listed on IDEAS

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    1. Sergio Mayordomo & Nicola Pavanini & Emanuele Tarantino, 2020. "The impact of alternative forms of bank consolidation on credit supply and financial stability," Working Papers 2021, Banco de España.
    2. Yao Luo & Ruli Xiao, 2019. "Identification of Auction Models Using Order Statistics," Working Papers tecipa-630, University of Toronto, Department of Economics.
    3. Luo, Yao & Xiao, Ruli, 2023. "Identification of auction models using order statistics," Journal of Econometrics, Elsevier, vol. 236(1).

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    More about this item

    Keywords

    Econometric and statistical methods; Financial Institutions;

    JEL classification:

    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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