Assessing Regulatory Responses to Banking Crises

During banking crises, regulators must decide between bailouts or liquidations,neither of which are publicly popular. A comprehensive assessment of regulators,however, requires examining all their decisions against regulators’ objectives of preserving financial stability while discouraging moral hazard. I develop a Bayesianlatent class model to assess regulators on these competing objectives and evaluatebanking and savings and loan (S&L) regulators during the 1980’s crises. I find thebanking authority (FDIC) conformed to these objectives whereas the S&L regulator (FSLIC), which subsequently became insolvent, deviated from them. Timelyinterventions based on this evaluation could have redressed the FSLIC’s decisionstructure and prevented losses to taxpayers