During the subprime crisis, the FDIC has shown, once again, laxity in resolving and closing insolvent institutions. Ronn and Verma (1986) call the tolerance level below which a bank closure is triggered the regulatory policy parameter. We derive a model in which we make this parameter stochastic...

Using two market-view variables, namely the regulatory forbearance fraction imbedded in the bank capital and the market-valued of the bank equity-to-assets ratio, derived from market equity and total liabilities from listed commercial banks in the U.S. and three countries (Japan, China, India)...