Bank Liability Structure, Fdic Loss, and Time to Failure: A Quantile Regression Approach

Abstract

Previous studies that aim to determine factors impacting the deposit insurer's loss arising from bank failures use standard econometric techniques that assume the losses are homogeneously driven by the same set of explanatory variables: However, deposit insurers are particularly concerned about high-cost failures. If the factors driving high-cost failures differ systematically from the determinants of low and moderate-cost failures, an alternative estimation technique is required. Using a sample of more than 1,000 bank failures in the US between 1984 and 1996, we present a quantile regression approach that illustrates the sensitivity of the dollar value of losses in different quantiles to our explanatory variables. The findings suggest that reliance on standard econometric techniques gives rise to misleading inferences and that losses are not homogeneously driven by the same factors across the quantiles. We also find that liability structure affects time to failure and that both insured and uninsured depositors are a source of market discipline.

Keywords: bank liability structure, loss given default, market discipline, quantile regression, time to failure

JEL Classification: G21, G28, C41, C49