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Reforming deposit insurance and FDICIA

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Author Info

  • Robert A. Eisenbeis
  • Larry D. Wall

Abstract

Current discussions about deposit insurance reform center on issues such as the size of insurance premiums, the size of the fund, and the size of the coverage limits-all issues that reflect a concern with how to allocate the losses arising from bank failures. The authors of this article argue that such issues, while important, do not affect the performance of the deposit insurance system nor should they be the focus of deposit insurance reform. They suggest that reform efforts should be directed toward strengthening the incentives to enforce the least cost resolution provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). ; The authors make the case that the large losses the FDIC has borne with some bank failures were due to supervisory forbearance. They suggest that a useful step forward would be to carry out FDICIA's mandate to develop and implement market value-type disclosures of the value of banks' assets and liabilities. Increasing the transparency of bank risk taking, as academics have long argued, would improve regulators' ability to monitor bank risk exposure. These reforms, combined with a different approach to risk-based premiums and measures to strengthen market discipline, such as expanded use of subordinated debt, merit further consideration as potential partial solutions to the problem of implementing FDICIA.

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Bibliographic Info

Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (2002)
Issue (Month): Q1 ()
Pages: 1-16

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Handle: RePEc:fip:fedaer:y:2002:i:q1:p:1-16:n:v.87no.1

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Related research

Keywords: Bank supervision ; Deposit insurance;

References

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  1. Larry D. Wall, 1997. "Taking note of the deposit insurance fund: a plan for the FDIC to issue capital notes," Economic Review, Federal Reserve Bank of Atlanta, issue Q 1, pages 14-30.
  2. Larry D. Wall & David R. Peterson, 1989. "The effect of Continental Illinois' failure on the financial performance of other banks," Working Paper 89-9, Federal Reserve Bank of Atlanta.
  3. William M. Isaac, 2000. "Financial reform's unfinished agenda: a look at deposit insurance funds," The Region, Federal Reserve Bank of Minneapolis, issue Mar, pages 34-37.
  4. James, Christopher, 1991. " The Losses Realized in Bank Failures," Journal of Finance, American Finance Association, vol. 46(4), pages 1223-42, September.
  5. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  6. Douglas D. Evanoff & Larry D. Wall, 2000. "Subordinated debt as bank capital: a proposal for regulatory reform," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 40-53.
  7. Dusan Stojanovic & Mark D. Vaughan & Timothy J. Yeager, 2000. "Is federal home loan bank funding a risky business for the FDIC?," The Regional Economist, Federal Reserve Bank of St. Louis, issue Oct, pages 4-9.
  8. Robert A. Eisenbeis, 1997. "Bank deposits and credit as sources of systemic risk," Economic Review, Federal Reserve Bank of Atlanta, issue Q 3, pages 4-19.
  9. Alan Greenspan, 2001. "The financial safety net," Proceedings 701, Federal Reserve Bank of Chicago.
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Citations

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Cited by:
  1. Clas Wihlborg, 2012. "Developing Distress Resolution Procedures for Financial Institutions," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  2. Robert A. Eisenbeis, 2004. "Agency problems and goal conflicts," Working Paper 2004-24, Federal Reserve Bank of Atlanta.
  3. Eisenbeis, Robert A. & Kaufman, George G., 2008. "Cross-border banking and financial stability in the EU," Journal of Financial Stability, Elsevier, vol. 4(3), pages 168-204, September.
  4. Hein, Scott E. & Koch, Timothy W. & Nounamo, Chrislain, 2012. "Moving FDIC insurance to an asset-based assessment system: Evidence from the special assessment of 2009," Journal of Economics and Business, Elsevier, vol. 64(1), pages 24-36.
  5. W. Scott Frame & Larry Wall, 2002. "Fannie Mae's and Freddie Mac's voluntary initiatives: Lessons from banking," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 45-59.
  6. Dwight Jaffee & Alexei Tchistyi & Boris Albul, 2013. "Contingent Convertible Bonds and Capital Structure Decisions," 2013 Meeting Papers 682, Society for Economic Dynamics.
  7. Robert A. Eisenbeis & George G. Kaufman, 2007. "Cross-border banking: challenges for deposit insurance and financial stability in the European Union," Working Paper 2006-15, Federal Reserve Bank of Atlanta.
  8. Antoine Martin, 2003. "A guide to deposit insurance reform," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 29-54.
  9. Akhigbe, Aigbe & Whyte, Ann Marie, 2012. "Does the use of stock incentives influence the payout policy of financial institutions?," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(1), pages 63-71.

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