Resolving Failed Banks: Uncertainty, Multiple Bidding, & Auction Design

Résumé

In this paper, we study the auction process that the US Federal Deposit Insurance Corporation (FDIC) uses to resolve insolvent banks, and that typically loses money on each transaction. Bidders must bid on multiple components and the scoring rule that the FDIC uses to evaluate these different dimensions is proprietary. As a result, banks are uncertain as to how bids for different packages will be evaluated and some banks are observed to submit multiple differentiated bids. We use FDIC data summarizing the bids submitted in auctions between 2009 and 2013 to structurally estimate the underlying preferences of banks for failed institutions and the different components. Using these estimates, we are able to perform counterfactuals that allow us to determine whether the FDIC could improve the efficiency of the process by eliminating the uncertainty and/or multiple bidding. Jason Allen, Rob Clark, Brent Hickman, and Eric Richert