Abstract
This paper develops an optimal resolution triage strategy for a deposit-insurance regulator. The regulator seeks to maximize the market value of the deposit insurance enterprise, subject to budget, personal, bureaucratic, political, informational and legal restraints. Testable hypotheses are derived concerning the timing of insolvency resolutions. The paper tests these hypotheses using a two-step hazards model and a data set of thrift resolutions during 1985–1989. The tests focus on the relative roles of value maximization and constraint pressures in decisions to grant capital forbearance. The results suggest that regulators seldom conformed to the benchmark resolution-timing strategy that an “unconflicted” agent would follow under only a budget constraint. Instead, the evidence shows that the resolution timing decision was distorted by personal, political, informational, and legal constraints.
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