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Taking note of the deposit insurance fund: a plan for the FDIC to issue capital notes

  • Larry D. Wall

In the United States the risk that a financial breakdown could lead to a taxpayer bailout of the deposit insurance fund has been cited to justify current regulatory controls on what activities may be affiliated with banks. Despite some regulatory changes in the 1990s to protect taxpayers from future debacles, however, widespread failures could still expose taxpayers to losses. ; This article proposes a new way to monitor the deposit insurance fund by having the FDIC issue capital notes. Because the interest paid on the notes would be suspended if the fund required a loan from the Treasury or eliminated if taxpayer funds were contributed to offset deposit insurance losses, noteholders would have more incentive to clearly signal the condition of the insurance fund. This signal would help regulators, taxpayers, and their congressional representatives monitor the health of the fund and would change the incentive structure facing FDIC directors. The cost of the notes would be minimal in part because the proceeds would be used to reduce banks' existing deposit insurance obligations.

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

Volume (Year): (1997)
Issue (Month): Q 1 ()
Pages: 14-30

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Handle: RePEc:fip:fedaer:y:1997:i:q1:p:14-30:n:v.82no.1
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  1. George G. Kaufman, 1996. "Bank Failures, Systemic Risk, and Bank Regulation," Cato Journal, Cato Journal, Cato Institute, vol. 16(1), pages 17-45, Spring/Su.
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  7. R. Alton Gilbert, 1990. "Market discipline of bank risk: theory and evidence," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 3-18.
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  11. Kane, Edward J., 1995. "Three paradigms for the role of capitalization requirements in insured financial institutions," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 431-459, June.
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  16. Jones, David S. & King, Kathleen Kuester, 1995. "The implementation of prompt corrective action: An assessment," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 491-510, June.
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  18. Kane, Edward J. & Kaufman, George G., 1993. "Incentive conflict in deposit-institution regulation: evidence from Australia," Pacific-Basin Finance Journal, Elsevier, vol. 1(1), pages 13-29, March.
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