Journal of Monetary Economics 20 (1987) 141-153. North-Holland AN ANALYSIS OF FDIC FAILED BANK AUCTIONS* Christopher JAMES University of Oregon, Eugene, OR 97403, USA Peggy WIER University of Rochester, Rochester, NY 14627, USA This paper examines whether the sales mechanism used by the FDIC in failed bank auctions results in wealth transfers from the FDIC to the acquiring banks. We test this hypothesis by examining the returns to winning bidders in FDIC auctions. We find positive abnormal returns to these bidders. More importantly, we find a negative and significant relation between the returns to winning bidders and the number of bidders participating in the auction. This evidence suggests that the FDIC’s auction procedures do generate wealth transfers. 1. Introduction The Federal Deposit Insurance Corporation (FDIC) is both a bank regu- lator and a bank deposit insurer. The FDIC as an insurer is supposed to deal with bank failures in the least costly way that is consistent with its regulatory assignment to preserve the safety and soundness of the banking system. One method of fulfilling the dual role is to arrange a transaction in which a healthy bank purchases some of a failed bank’s assets and assumes its liabilities. Such purchase and assumption transactions (P&A’s) are sealed bid fist price auctions, usually conducted within a few days of the closure of the failed bank. Only banks that possess certain financial characteristics and operate within a specified geographical area around the failed bank are invited to submit bids. No bank may participate in the auction if, in the opinion of the FDIC, its acquisition of the assets would cause a substantial lessening of competition in the failed bank’s output market (12 USC 1823 Section 13). Recent research on auctions suggests that the mechanism used for selling an asset can affect the revenues received by the seller.’ FDIC failed bank auctions < *This research was supported in part by McGraw-Hill Incorporated which provided us access to the Data Resources Incorporated Securities Price File. The authors thank the participants of the finance workshops at the University of Oregon, the University of Michigan and the University of Utah. ‘See, for example, Vickery (1961), Milgrom and Weber (1982), Riley and Samuelson (1981). and Cammack (1985), for analysis leading to this conclusion. 03043932/87/$3.50@1987, Elsevier Science Publishers B.V. (North-Holland)