Michael Ohlrogge is Associate Professor at NYU School of Law. This post is based on his recent paper.
I. Introduction
The recent failures of Silicon Valley Bank and First Republic have drawn attention to how rare it is for uninsured depositors at a failed bank to bear losses. Over the past 15 years, uninsured depositors have experienced losses in only 6% of US bank failures. In a newly released paper, I show that ubiquitous rescues of uninsured depositors represent a recent phenomenon dating only to 2008: for many years prior to that, uninsured depositor losses were the norm. I also show that the rise of uninsured depositor rescues has coincided with a dramatic increase in FDIC costs of resolving failed banks, which I estimate resulted in at least $45 billion in additional resolution expenses over the past 15 years.
Scholars have long regarded certain attributes of corporate governance, particularly legal protections of private ownership, as prerequisites for financial development, deep capital markets and economic growth. Yet, the development of the Chinese market challenges many of the underlying assumptions of this “law matters” thesis. For decades, China achieved substantial growth and developed markets while preserving market control, state ownership, and relatively weak legal institutions. Informal means and functional substitutes provided investors with credible assurances that filled in some of the voids of law by incentivizing growth and governing markets.
