decision is seen as an'administrative option that regulatory authorities may or may not choose to exercise, even when the bank is economically insolvent. The tradeoffs involved will, among others, be of a public choice nature and include the importance of the particular financial institution to the local economy and its potential systemic impact on the rest of the financial system. In such a case, in order to avoid closure, government support may be deployed either directly, e.g., through recapitalization, or indirectly, e.g., the regulatory authorities may convince a sound bank to acquire the distressed bank on terms favorable to the acquiring bank. Or regulatory forbearance, accounting or tax preferences may be granted to the particular financial institution. Other factors may also play an important role in the closure decision. Even in institutional settings with clear processes for dealing with weak financial institutions, the fate of a banking institution is typically not determined by its solvency status or public choice criteria only, as was observed in the US Savings and Loan crisis. Other factors that may play a role include regulatory capture and political considerations regarding which institutions are to be accorded a preferential treatment.

Arguably, the decision to leave distressed financial institutions open rather than close them, is more likely necessary and can make for good public policy during a systemic crisis. After all, it will be difficult to close down a large part of the financial system, even if many financial institutions are technically insolvent. But, the decisions, which distressed financial institutions to leave open, are likely also more dliscretionary in time of a systemic crisis. At such time, not only will it be difficult to distinguish problems of illiquidity from problems of insolvency, but the government is likely also more constrained in its ability, both financially and institutionally, to take on a large number of insolvent financial institutions. The occurrence of financial distress and the decision to close can thus be quite independent events in a systemic crisis.<sup>5</sup> Empirical papers on financial institutions' distress and closure generally follow a two-step approach. First, groups of financial institutions are classified in closed vs. nonclosed, de facto-failed vs. non-failed, problem vs. non-problem, etc. Second, on the basis of accounting (balance sheet and income statement data) and/or market information, statistical techniques are applied to identify the ex-post determinants of the event. Techniques include multiple discriminant analysis, logit or probit regression models, twostep logit regression procedures and, more recently, proportional hazard models, where both the probability of failure-event occurring and the timing of that event are estimated (Lane, Looney and Wansley 1986; Whalen 1991; Cole and Gunther 19,95; GonzalesHermosillo 1999).

We take advantage of and build on this literature in several ways. First, we investigate both the occurrence of distressed versus non-distressed financial institutions as well as the closure decisions for distressed financial institutions. We do so as, on one hand, the broader concept of economic failure rather than the more restrictive concept of

> 5 There are some empirical studies, which treat closure and insolvency as two separate events and modeling the regulator's decision to close banking institutions. These include Demirglic-Kunt (1989, 1991), Gajewsky (1990) and Thomson (1991 and 1992).

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