chapter 18 appendix 1 evaluating fdicia and other proposed reforms of the banking regulatory system

Chapter 18Appendix 1

Evaluating FDICIA and

Other Proposed Reforms of the Banking Regulatory

System

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Limits on the Scope of Deposit Insurance

• FDICIA’s reduction of the scope of deposit insurance─ Limit insurance on brokered deposits─ Restrict too-big-to-fail policy

• Result? Increased losses to uninsured depositors.



• Further suggestions for policy─ Reduce deposit insurance from $250,000 to

$50,000 or lower─ Coinsurance – say only 90% of deposits insured─ Eliminate too-big-to-fail altogether



• Critics of new policies─Depositors really unable to monitor banks─ Runs from fear can lead to the failure of a solvent

bank─ Eliminating too-big-to-fail could lead to panics─ Letting big banks fail is difficult in practice – who

handles the asset sales?


Prompt Corrective Action

• FDICIA uses sticks and carrots to manage bank capital ─Well-capitalized – earn privileges─ Under-capitalized – more examinations

• Could close banks when capital is low, but not zero

• Current and proposed laws may have problems; likely to reduce losses to FDIC


Risk-Based Insurance Premiums

• FDIC premiums based on asset risk and level of capital

• Why not?─Measuring asset risk is difficult─ Need to account for credit risk and general

interest rate risk


Other FDICIA Provisions

• Annual bank examinations• Give Fed greater resources / ability to

monitor foreign banks in the US• Increase reporting requirements


Other Proposed Changes in Banking Regulation

• Regulatory Consolidation─ FDIC, OCC, Thrift Supervision, the Fed, and state

authorities regulate banks─ Attempt to consolidate in mid-1990s failed in

Congress, but will come up again


Other Proposed Changes in Banking Regulation

• Market-Value Accounting for Capital─ Change book values to market values, possibly

for all assets and liabilities─ Some assets/debts difficult to value─ Cost / benefit of noisy estimates of value not

clear


Overall Evaluation

• Changes are heading in the right direction• More needs to be done to improve

incentives for banks to take on less risk and hold more capital

• Eliminating deposit insurance and too-big-to-fail might be going too far

chapter 18 appendix 1 evaluating fdicia and other proposed reforms of the banking regulatory system

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