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DANGERS OF CAPITAL FORBEARANCE: THE CASE OF THE FSLIC AND "ZOMBIE" S&Ls

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  • EDWARD J. KANE

Abstract

This paper portrays Federal Savings and Loan Insurance Corporation (FSLIC) forbearance and congressional unwillingness to increase the FSLIC's human or capital resources to the size necessary to handle developing economic insolvencies as a joint policy crime that has served to bifurcate the savings and loan industry into the living and the living dead. As agents for the taxpayer, Congress and the FSLIC have assumed too much discretion and have chosen to exercise that discretion myopically. An agent has a duty to represent its principal's economic interests more effectively than this. The FSLIC's policy touchstone should be to negotiate and enforce the same kind of covenant provisions that a prudent private guarantor would require. Copyright 1987 Western Economic Association International.

Suggested Citation

  • Edward J. Kane, 1987. "DANGERS OF CAPITAL FORBEARANCE: THE CASE OF THE FSLIC AND "ZOMBIE" S&Ls," Contemporary Economic Policy, Western Economic Association International, vol. 5(1), pages 77-83, January.
  • Handle: RePEc:bla:coecpo:v:5:y:1987:i:1:p:77-83
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1465-7287.1987.tb00247.x
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    References listed on IDEAS

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    1. Edward J. Kane, 1985. "The Gathering Crisis in Federal Deposit Insurance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262611856, March.
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    Cited by:

    1. Gary Gorton & Lixin Huang, 2004. "Liquidity, Efficiency, and Bank Bailouts," American Economic Review, American Economic Association, vol. 94(3), pages 455-483, June.
    2. Edward J. Kane, 1989. "How Incentive-Incompatible Deposit-Insurance Funds Fail," NBER Working Papers 2836, National Bureau of Economic Research, Inc.
    3. Goldberg, Lawrence G. & Hudgins, Sylvia C., 1996. "Response of uninsured depositors to impending S&L failures: Evidence of depositor discipline," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(3), pages 311-325.
    4. Korte, Josef, 2013. "Catharsis - The Real Effects of Bank Insolvency and Resolution," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79938, Verein für Socialpolitik / German Economic Association.
    5. Hundtofte, Sean, 2017. "Does going easy on distressed banks help economic growth?," Staff Reports 823, Federal Reserve Bank of New York, revised 01 Jan 2018.
    6. repec:eee:chieco:v:44:y:2017:i:c:p:327-342 is not listed on IDEAS
    7. Amir Amel-Zadeh & Geoff Meeks, 2013. "Bank Failure, Mark-to-market and the Financial Crisis," Abacus, Accounting Foundation, University of Sydney, vol. 49(3), pages 308-339, September.
    8. Marinč, Matej & Rant, Vasja, 2014. "A cross-country analysis of bank bankruptcy regimes," Journal of Financial Stability, Elsevier, vol. 13(C), pages 134-150.
    9. 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.

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