Resolving Failed Banks: Uncertainty, Multiple Bidding & Auction Design

The FDIC resolves insolvent banks using a scoring auction. Although the basic structure of the scoring rule is known to bidders, they are uncertain about how the FDIC makes trade-offs between the different components. Uncertainty over the scoring rule motivates bidders to submit multiple bids for the same failed bank. To evaluate the effects of uncertainty and multiple bidding for FDIC costs we develop a methodology for analyzing multidimensional bidding environments where the auctioneer’s scoring weights are unknown to bidders, ex-ante. We estimate private valuations for banks that failed during the great financial crisis and compute counter-factual experiments in which scoring uncertainty is eliminated. Our findings imply a substantial within-sample reduction in FDIC resolution costs of between 29.8% ($8.2Billion) and 44.6% ($12.3Billion). These savings can reduce policy-driven banking sector distortions, since FDIC resolution costs must be covered either through special levies on banks or through loans from the US Treasury.