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Are Banks Really Special? New Evidence from the Fdic-Induced Failure of Healthy Banks

The FDIC used cross-guarantees to close thirty-eight subsidiaries of First Republic Bank Corporation in 1988 and eighteen subsidiaries of First City Bancorporation in 1992 when lead banks from each of these Texas-based bank holding companies were declared insolvent. I use this exogenous failure of otherwise healthy subsidiary banks as a natural experiment for studying the impact of bank failure on local-area real economic activity. I find that the closings of the subsidiaries were associated with a significant decline in bank lending that led to a permanent reduction in real county income of about 3 percent.