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

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  • Larry D. Wall

Abstract

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.

Suggested Citation

  • 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.
  • Handle: RePEc:fip:fedaer:y:1997:i:q1:p:14-30:n:v.82no.1
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    Citations

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    Cited by:

    1. Edward J. Kane, 2012. "Ethical Failures in Regulating and Supervising the Pursuit of Safety Net Subsidies," Chapters,in: Research Handbook on International Financial Regulation, chapter 3 Edward Elgar Publishing.
    2. Gillian Garcia & Henriëtte Prast, 2004. "Depositor and investor protection in the Netherlands: past, present and future," DNB Occasional Studies 202, Netherlands Central Bank, Research Department.
    3. Edward Kane, 2001. "Financial safety nets: reconstructing and modelling a policymaking metaphor," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 10(3), pages 237-273.
    4. Larry D. Wall & María J. Nieto & David G. Mayes, 2011. "Creating an EU-level supervisor for cross-border banking groups: Issues raised by the U.S. experience with dual banking," FRB Atlanta Working Paper 2011-06, Federal Reserve Bank of Atlanta.
    5. Edward Kane, 2000. "Architecture of Supra-Governmental International Financial Regulation," Journal of Financial Services Research, Springer;Western Finance Association, vol. 18(2), pages 301-318, December.
    6. Kane, Edward J., 2002. "Using deferred compensation to strengthen the ethics of financial regulation," Journal of Banking & Finance, Elsevier, vol. 26(9), pages 1919-1933, September.
    7. Robert A. Eisenbeis & Larry D. Wall, 2002. "Reforming deposit insurance and FDICIA," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 1-16.
    8. Goldberg, Lawrence G. & Hudgins, Sylvia C., 2002. "Depositor discipline and changing strategies for regulating thrift institutions," Journal of Financial Economics, Elsevier, vol. 63(2), pages 263-274, February.
    9. Larry Wall & Robert Eisenbeis, 1999. "Financial Regulatory Structure and the Resolution of Conflicting Goals," Journal of Financial Services Research, Springer;Western Finance Association, vol. 16(2), pages 223-245, December.
    10. Aerdt Houben & Jan Kakes & Garry Schinasi, 2004. "Towards a framework for financial stability," DNB Occasional Studies 201, Netherlands Central Bank, Research Department.
    11. Lee, Wai Sing & Kwok, Chuck C. Y., 2000. "Domestic and international practice of deposit insurance: a survey," Journal of Multinational Financial Management, Elsevier, vol. 10(1), pages 29-62, January.

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