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Bank Capital Forbearance And Public Policy

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  • GEORGE G. KAUFMAN

Abstract

Recently, the bank regulatory agencies have adopted capital forbearance programs to permit some troubled agriculture and energy banks to operate temporarily with capital levels below the regulatory minimum requirement. In a world with federal deposit insurance and a lender of last resort, bank capital is no longer viewed by all depositors as the primary protector of their funds. Thus, they reduce their market discipline. Bank owners/ managers are likely to respond by increasing their risk exposure in an attempt to regain profitability. If they win, they keep all the gains; if they lose, the losses are passed on to the Federal Deposit Insurance Corporation (FDIC). A preferred policy is to require these banks to raise additional capital at this time or to be sold. Capital forbearance is forbearance of incumbent bank management/owners, not of bank customers.

Suggested Citation

  • George G. Kaufman, 1987. "Bank Capital Forbearance And Public Policy," Contemporary Economic Policy, Western Economic Association International, vol. 5(1), pages 84-91, January.
    • Handle: RePEc:bla:coecpo:v:5:y:1987:i:1:p:84-91
    DOI: 10.1111/j.1465-7287.1987.tb00248.x
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    References listed on IDEAS

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    1. Kaufman, George G, 1986. "Federal Bank Regulatory Policy: Comment," The Journal of Business, University of Chicago Press, vol. 59(1), pages 69-77, January.
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    Cited by:

    1. Kane, Edward J. & Yu, Min-Teh, 1996. "Opportunity cost of capital forbearance during the final years of the FSLIC mess," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(3), pages 271-290.
    2. Edward J. Kane & Min-Teh Yu, 1994. "How Much Did Capital Forbearance Add to the Cost of the S&L Insurance Mess," NBER Working Papers 4701, National Bureau of Economic Research, Inc.
    3. Schellhorn, Carolin D. & Spellman, Lewis J., 2000. "Bank forbearance: A market-based explanation," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(4), pages 451-466.
    4. Chuang‐Chang Chang & San‐Lin Chung & Ruey‐Jenn Ho & Yu‐Jen Hsiao, 2022. "Revisiting the valuation of deposit insurance," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(1), pages 77-103, January.

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