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Lessons from New England bank failures

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  • Richard E. Randall
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    Abstract

    The failure of the Rhode Island Share and Deposit Indemnity Corporation (RISDIC), a private insurance fund, and the closure of its 45 remaining member institutions froze the accounts of 300,000 individuals and 10 percent of all deposits in the state. While the closure of two institutions triggered RISDIC’s demise, flaws in both design and management had set the stage for failure and are the focus of this article. The authors group RISDIC’s problems into three categories: risk concentrations, control of the insurance fund by those it insured, and RISDIC’s inadequate regulatory oversight of members. ; Concentrations of risks abounded. Both the fund and the geographic area it covered were small, and member institutions lent heavily in real estate. The fund’s failure to sufficiently reserve against this exposure was particularly problematic: RISDIC could not have covered major losses at any one of its 10 largest members. RISDIC also neglected standard regulatory practices in supervising member institutions. Adequate deposit insurance rests on several fundamentals, among them diversification, independent supervision, disclosure of weaknesses, and adequate reserves; RISDIC managed to delay but not avoid the consequences of neglecting these principles.

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    File URL: http://www.bostonfed.org/economic/neer/neer1993/neer393a.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

    Volume (Year): (1993)
    Issue (Month): May ()
    Pages: 13-35

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    Handle: RePEc:fip:fedbne:y:1993:i:may:p:13-35

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    Keywords: Bank failures ; New England;

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    Cited by:
    1. Vicente Salas & Jesús Saurina, 2002. "Credit Risk in Two Institutional Regimes: Spanish Commercial and Savings Banks," Journal of Financial Services Research, Springer, vol. 22(3), pages 203-224, December.
    2. Jesús Saurina-Salas, 1998. "Determinantes de la morosidad de las cajas de ahorro españolas," Investigaciones Economicas, Fundación SEPI, vol. 22(3), pages 393-426, September.
    3. Walker F. Todd, 1994. "Similarities and dissimilarities in the collapses of three state- chartered private deposit insurance funds," Working Paper 9411, Federal Reserve Bank of Cleveland.
    4. Steven Ongena, 1999. "Lending Relationships, Bank Default and Economic Activity," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 6(2), pages 257-280.
    5. Santiago Fernández de Lis & Jorge Martínez Pagés & Jesús Saurina, 2000. "Credit Growth, Problem Loans and Credit Risk Provisioning in Spain," Banco de Espa�a Working Papers 0018, Banco de Espa�a.
    6. Jo-Hui Chen & Chih-Sean Chen, 2011. "The effects of international off-site surveillance on bank rating changes," Quality & Quantity: International Journal of Methodology, Springer, vol. 45(6), pages 1313-1329, October.
    7. Niinimaki, J. -P., 2001. "Intertemporal diversification in financial intermediation," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 965-991, May.
    8. John S. Jordan, 1998. "Resolving a banking crisis: what worked in New England," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 49-62.
    9. William P. Osterberg & James B. Thomson, 1994. "Underlying determinants of closed-bank resolution costs," Working Paper 9403, Federal Reserve Bank of Cleveland.
    10. Paul Leonard & Rita Biswas, 1998. "The Impact of Regulatory Changes on the Risk-Taking Behavior of State Chartered Savings Banks," Journal of Financial Services Research, Springer, vol. 13(1), pages 37-69, February.
    11. Cole, Rebel A. & Fenn, George W., 1996. "The role of commercial real estate investments in the banking crisis of 1985-92," MPRA Paper 24692, University Library of Munich, Germany, revised 01 Nov 2008.

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