A Program for Minimizing the Private and Public Costs of Bank Failures

Abstract

Bank failures are often perceived to be more costly to the economy than the failure of other firms of comparable size and to generate widespread public fear. As a result, preventing bank failures is a major public policy concern in all countries. Unfortunately, most public policy strategies adopted in nearly all countries to achieve this objective have eventually failed to do so, at a large cost, not only in reduced income and wealth to the failed bank’s customers and in the bank’s market area, but also to the taxpayers of the country as a whole, who have frequently been asked to finance most or all of the losses to bank depositors, other creditors, and, at times, even shareholders. The high cost of these policies has encouraged a search for more efficient ways of protecting the economy from bank failures, while permitting poorly managed or unlucky individual banks to exit but at no or little cost to either their customers or the economy. This paper proposes a four-pillar program to achieve this objective efficiently.