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Banking-system shutdowns during contractions scar economies. Four times in the last forty years, governors suspended payments from state-insured depository institutions. Suspensions of payments in Nebraska (1983), Ohio (1985), and Maryland (1985), which were short and occurred during expansions, had little measurable impact on macroeconomic aggregates. Rhode Island’s payments crisis (1991), which was prolonged and occurred during a recession, lengthened and deepened the downturn. Unemployment increased. Output declined, possibly permanently relative to what might have been. We document these effects using a novel Bayesian method for synthetic control that characterizes the principal types of uncertainty in this form of analysis. Our findings suggest policies that ensurebanks continue to process payments during contractions – including the bailouts of financial institutions in 2008 and the unprecedented support of the financial system during the COVID crisis – have substantial value.

Cases the Federal Deposit Insurance Corporation (FDIC) pursues against the directors and officers of failed commercial banks for (gross) negligence are important for the corporate governance of U.S. commercial banks. These cases shape the kernel of bank corporate governance, as they guide expectations of bankers and regulators. Ours is the first empirical study of such legal cases that define the limits of acceptable behavior under financial distress. We examine the differences in behavior of all 408 U.S. commercial banks that were taken into receivership between 2007–2012. Sued banks had different balance sheet dynamics in the three years prior to failure. These generally larger banks were faster growing, obtained riskier funding and were more “optimistic”. We find evidence that the behavior of bank boards adjusts in an out-of-sample set of banks. Our results suggest the FDIC does not only pursue “deep pockets”, but sets corporate governance standards for all banks by suing negligent directors and officers.