Reforming deposit insurance and FDICIA
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.
Volume (Year): (2002)
Issue (Month): Q1 ()
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References listed on IDEAS
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- 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.
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- 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.
- 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.
- 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.
- Wall, Larry D. & Peterson, David R., 1990.
"The effect of Continental Illinois' failure on the financial performance of other banks,"
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Elsevier, vol. 26(1), pages 77-99, August.
- 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.
- Alan Greenspan, 2001. "The financial safety net," Proceedings 701, Federal Reserve Bank of Chicago.
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