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Lessons from New England bank failures

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  • Richard E. Randall

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.

Suggested Citation

  • Richard E. Randall, 1993. "Lessons from New England bank failures," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 13-35.
  • Handle: RePEc:fip:fedbne:y:1993:i:may:p:13-35
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    Cited by:

    1. 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.
    2. 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.
    3. Santiago Fernández de Lis & Jorge Martínez Pagés & Jesús Saurina, 2001. "Credit growth, problem loans and credit risk provisioning in Spain," BIS Papers chapters,in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 331-353 Bank for International Settlements.
    4. 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.
    5. 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.
    6. repec:eee:finsta:v:30:y:2017:i:c:p:209-228 is not listed on IDEAS
    7. 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;Western Finance Association, vol. 13(1), pages 37-69, February.
    8. 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.
    9. Robert E. Litan & R. Alton Gilbert, 1993. "Prepared discussant comments," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 37, pages 131-146.
    10. Niinimaki, J. -P., 2001. "Intertemporal diversification in financial intermediation," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 965-991, May.
    11. 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.
    12. Vihriälä, Vesa, 1997. "Banks and the Finnish credit cycle 1986-1995," Scientific Monographs, Bank of Finland, number 1997_007, November.
    13. Vicente Salas & Jesús Saurina, 2002. "Credit Risk in Two Institutional Regimes: Spanish Commercial and Savings Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 22(3), pages 203-224, December.
    14. António Miguel Martins & Ana Paula Serra & Francisco Vitorino Martins & Simon Stevenson, "undated". "Residential Property Loans and Bank Performance during Property Price Booms: Evidence from Europe," Real Estate & Planning Working Papers rep-wp2014-05, Henley Business School, Reading University.
    15. William P. Osterberg & James B. Thomson, 1994. "Underlying determinants of closed-bank resolution costs," Working Paper 9403, Federal Reserve Bank of Cleveland.

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    Keywords

    Bank failures ; New England;

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