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F e d e ra l R e s e rv e B a n k
of M in n e a p o lis
1988 A n n u a l R e p o rt
ACASE
FEDERAL
DEPOSIT
fo r R e fo r m m g
INSURANCE
Contents
Federal Reserve Bank
President’s Message
of Minneapolis
A Case for Reforming
Federal Deposit Insurance
1988 Annual Report
3
Statem ent of Condition
18
Earnings and Expenses
19
B y Jo hn H. Boyd
Directors
20
Research Officer
Officers
21
and Arthur J . Rolnick
Director of Research
The views expressed in this
annual report are expressly those
of the authors; they are not
intended to represent a formal
position of the Federal Reserve
System.
President’s Message
T
h e p r o b le m s t h a t in r e c e n t y e a rs h a v e p la g u e d
th e b a n k in g a n d th r if t in d u s tr ie s u n d e r s c o r e th e
n e e d to re v ie w th e r e g u la tio n s g o v e r n in g th e se
in s titu tio n s a n d th e in s u r a n c e sy ste m p r o te c tin g d e
p o sito rs. F e d e r a l d e p o s it in s u r a n c e , in p a r t i c u la r , h a s
su ccessfu lly p r o m o te d f in a n c ia l s ta b ility b u t, as w e see
in th e c u r r e n t s a v in g s a n d lo a n crisis, th e co sts o f d o in g
so c a n b e v e r y h ig h . E s s e n tia lly , as is th e c a se w ith
in s u r a n c e g e n e ra lly , d e p o s it in s u r a n c e e n c o u ra g e s e x
c e ssiv e ris k ta k i n g , th e s o - c a lle d
“ m o ra l h a z a rd ”
p ro b le m .
I n th is essay , w e a d v o c a te tw o re fo rm s w h ic h , w e
b e lie v e , w ill a p p ly m u c h n e e d e d m a r k e t d is c ip lin e to
b a n k s a n d o t h e r d e p o s ito ry in s titu tio n s a n d , in so d o in g ,
w ill m itig a te m o r a l h a z a r d . O n e p r o p o s a l— th e less
c o n tr o v e r s ia l o f th e tw o — is a n in c re a s e in b a n k c a p ita l
r e q u ir e m e n ts . A v ir tu e o f th is p r o p o s a l is t h a t , if c a p ita l
lev e ls a r e r a is e d , b a n k o w n e rs w ill h a v e m o r e a t sta k e
a n d th e r e f o r e m ig h t c o n d u c t t h e i r a ffa irs in a m o re
p ru d e n t m a n n e r.
T h e s e c o n d , a n d m o r e c o n tr o v e r s ia l, p r o p o s a l is to
rev ise fe d e r a l d e p o s it in s u r a n c e to in c lu d e a c o - in s u r
a n c e f e a tu r e . W h ile th e r e a r e a n y n u m b e r o f w a y s th is
t h a t l i m i t t h e s y s te m ic r e p e r c u s s io n s o f is o la te d
p ro b le m s . N e v e rth e le ss, w e a c k n o w le d g e t h a t c o -in s u r
m ig h t b e a c c o m p lis h e d , w e s u g g e st th a t , a b o v e so m e
a n c e sacrifices so m e o f th e s ta b ility a c h ie v e d w ith th e
m in im u m , o n ly 9 0 p e r c e n t o f a d e p o s it b e in s u re d . I f
c u r r e n t d e p o s it in s u r a n c e sy ste m , a sa crifice th a t seem s
a d o p te d , s u c h a s c h e m e s h o u ld s ig n ific a n tly r e d u c e th e
ju s tif ie d in v ie w o f th e h ig h co sts o f m o r a l h a z a r d .
c o st o f p r o m o t in g f in a n c ia l s ta b ility b y e n h a n c in g
F in a lly , if in c re a s e d m a r k e t d is c ip lin e is to b e effective
m a r k e t d is c ip lin e . D e p o s ito rs w ill h a v e m o r e in c e n tiv e
a n d e q u ita b le , d e p o s ito r y in s titu tio n s m u s t b e tr e a te d
to m o n ito r b a n k risk a n d to b e c o m p e n s a te d a c c o r d
id e n tic a lly , irre s p e c tiv e o f size. T h e s e p ro p o sa ls a re
in g ly ; b a n k s , as a re s u lt, w ill h a v e m o r e in c e n tiv e to
o ffere d w ith t h a t in m in d .
h o ld safe p o rtfo lio s . M o r e o v e r , w e w o u ld e x p e c t coin s u r a n c e to p r o m o te d iv e rs ific a tio n a n d o t h e r c h a n g e s
in b e h a v io r t h a t w o u ld r e d u c e sy ste m ic v u ln e r a b ility to
a p r o b le m a t a p a r t i c u la r fin a n c ia l in s titu tio n .
I n m y v ie w , th is p r o p o s a l is f a r less r a d ic a l t h a n it
m a y se e m a t first g la n c e . C o - in s u r a n c e c a n b e p h a s e d in
g r a d u a lly a n d , as n o te d , s h o u ld p r o m o te a d ju s tm e n ts
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ed eral deposit, in su ran ce has long been reg ard ed as
one o( o u r most successful g o v ern m en t pro g ram s. It
is now in need o f serious rep air. E stablished in 1933
to stem an in stab ility p ro b lem in b an k in g , deposit insurance
succeeded as well as C ongress could have hoped. M ore
recently, how ever, as federally insured in stitu tio n s have
becom e less reg u lated , a p ro b lem wit h deposit insurance has
surfaced. In o rd e r to allow b anks to survive in a m ore
co m p etitiv e en v iro n m e n t, C ongress a n d b ank regulators,
over th e past eight years, have relaxed the reg u lato ry reins.
But they did not, as some advised, reform deposit in su r
ance. 1As a result , banks have becom e m ore co m p el it ive but
at th e expense o f ta k in g on co n sid erab ly m ore risk. In elfcct.
a fu n d a m e n ta lly difficult p ro b lem w ith deposit b an k in g has
been ex ch an g ed for one w ith deposit insurance.
O v e r th e years, m any econom ists have w arn ed of a
pro b lem w ith th e federal deposit in surance system. W hile
p ro te c tin g depositors, deposit in surance enco u rag es banks
to tak e on m o re risk th a n th ey otherw ise w ould. 1'his is the
so-called ‘‘m o ral h a z a r d ’* p ro b lem th at is inheren t w ith
alm ost all in su ran ce policies. H ow ever, because th e deposit
insu ran ce system a p p e a re d to w ork so well a n d because so
few banks failed, these w arn in g s w ent u n h eed ed . P ro
p o n en ts of b a n k d e re g u la tio n arg u ed th at th e supervisory
agencies w ere w ell-eq u ip p ed to c o n ta in m oral h a z a rd an d
th at th e low b an k -fa ilu re ra te pro v id ed stro n g su p p o rt for
this point ol view.
S o m e th in g is now am iss. T h e low b an k -failu re ra te did
not c o n tin u e into th e 1980s. Since th e b eg in n in g o f this
d e cad e over 800 banks have failed, in clu d in g a few of the
largest in th e industry. M an y m ore are lacin g som e financial
difficulties. A m u ch worse situ atio n has developed in the
savings a n d loan ind u stry , w hich is p ro tected by its ow n
federal deposit insurance*. This in d u stry has d e m o n stra te d
just how high the cost o f m oral h a z a rd can be. E stim ated
losses to the* F ed eral S avings a n d L oan In su ran ce C o rp o ra
tion T S L I C ; now ran g e up to S100 billion o r higher, a cost
th a t will likely be b o rn e by th e ta x p a y e r. N o lo n g er dot's it
appear- th a t those w ho w a rn e d o f m oral h azard w ere crying
wolf.2
F
T h e re is now an obv ious need to reform the way banks
are reg u la te d a n d depositors are p ro tected. W h at is not so
obvious is the best w ay to reform . Som e suggest that banks
be c o n stra in e d to ho ld in g only safe assets. O th ers argue that
closer m o n ito rin g an d p ricin g of bank risk will solve the
pro b lem . Still oth ers believe tro u b led banks should be
closed before th eir net w orth becom es negative. An ex am in a
tion o f such reform s, how ever, suggests that they w on’t work
an d o r are extrem ely costly.
T h e reform s, we th ink, th at will be effective involve a
la rg e r role for m arket involvem ent. A nd they reflect w hat
we see in p riv ate in su ran ce c o n trac ts th at are successful in
co n ta in in g m oral h az ard . In p artic u la r, priv ate m arket
ex p erience suggests th a t the costs of c o n tain in g m oral
h a z a rd will have to be shared by the insured. D epositors w ill
hav e to b e a r som e risk of loss— an d b ank ow ners a g reater
share th a n they do now. This, in tu rn , will m ean the b an king
system will be p o ten tially m ore p rone to depositor in sta
bility. N evertheless, given th e problem s w ith the cu rren t
b a n k in g system, some trad eo ff is war ranted.
Before federal deposit in su ran ce was in place, the b an king
system was in periodic turm oil. B ank panics, a large n u m b er
of b an k failures caused at least in p a rt by a general loss of
confidence in the b a n k in g system a n d acco m p an ied by a
m ajo r econom ic c o n tra c tio n , w ere a re g u lar feature ol the
I .S. econom y. Such panics o ccurred in virtually every
d e cad e follow ing tin* passage o fth e N atio n al B anking Act of
1863. T h e pan ic o f 1907 finally convinced C ongress that
m ore direct g o v ern m en t involvem ent was necessary. W hile
federal deposit in su ran ce was discussed, it was u ltim ately
rejected. In 1913 C ongress cre ated the F ed eral Reserve
System to be the lender-of-last-resort: a cen tral bank that
co m m ercial banks could tu rn to w hen depositors' confi
dence w aned. N evertheless, less th a n 20 years later, the
U n ite d S tates ex p erien ced its worst b an k in g panic as over
one-fifth of I .S. com m ercial banks suspended operations
■F rie d m a n an d S chw artz 11963. p. 299 p.
T o b u ild d ep o sito r confidence a n d help p re v e n t b an k
panics, C ongress established th e F e d e ra l D ep o sit In su ran ce
C o rp o ra tio n (FD IC ). O n J a n u a r y 1, 1934, th e F D IC w ent
into business in su rin g deposits u p to $2,500 in b anks th a t
h a d chosen to becom e m em b ers o f this new g o v ern m en t
c o rp o ra tio n (on J u ly 1 th e m a x im u m co verage w as raised to
$5,000). O v e r th e y ears th e fra c tio n o f to ta l deposits th a t th e
F D IC insured has g ra d u a lly increased, as m o re d epositors
chose in su red b an k s a n d m a x im u m deposit coverage was
raised. (See T a b le 1.) T o d a y , th e F D IC insures deposits up
to $100,000 p e r acco u n t, a n d this in su ran ce covers over 75
p ercen t o f all b a n k deposits. B ut even so-called “ u n in su re d
deposits,” those in acco u n ts th a t exceed $100,000, have
alm ost alw ays been p ro te c te d as well. C o n sid er th a t of the
184 banks th a t failed in 1987 only 14 p e rc e n t o f th e u n
insured deposits w ere n o t p a id in fu ll.3 B ecause o f th e F D IC ,
m ost depositors no lo n g er h av e an y reason to w ith d ra w th e ir
funds based on fears a n d ru m o rs th a t th e ir b a n k is failing.
In d eed , w id esp read b a n k p an ics (of th e sort e x p erien ced in
th e 1930s) h av e becom e in te re stin g curiosities in b a n k in g
history, ra th e r th a n co n te m p o ra ry policy problem s.
One Problem Solved, Another Introduced
D eposit in su ran ce solved a n in h e re n t p ro b le m w ith deposit
banking, b u t it in tro d u c e d a n in h e re n t p ro b le m w ith in
surance. M ost in su ran ce has a p o te n tia lly costly side effect
called ‘ ‘m o ral h a z a rd ,” w hich is w ell-know n in th e industry.
P eople w ho a re in su red a g a in st a p a r tic u la r risk hav e a n
incentive to c h an g e th e ir b eh av io r. C o n sid er th e ow ners of
a factory w ho p u rch ase fire in su ran ce. P rio r to this p u r
chase, they w o u ld have to b e a r th e e n tire cost o f a co n
flagration. O n c e insured, th o u g h , a g re a t p a rt o f th e cost will
be b o rn e by th e in su ran ce c o m p an y . F o r a fixed a n n u a l fee
th e ow ners’ co n cern a b o u t such a loss is significantly alle
viated , w hich is th e obvious b enefit o f insu ran ce. C onse
qu en tly , th e in su ran ce c o m p a n y should expect th e in sured
to take m ore risks th a n th ey w ould hav e w ith o u t th e in
su rance. T h e in su red c a n now afford to be a little less
cau tio u s a b o u t th e disposing o f fla m m a b le m a te ria ls such as
old p a in t cans o r c h em ical co n ta in e rs. If th e in su ra n ce co m
p an y hopes to re m a in in business, it m ust tak e a c c o u n t of
such b e h a v io ra l chan g es w h en p ric in g a n d a d m in iste rin g
policies.
T h e federal deposit in su ran ce system suffers from this
sort o f p ro b lem . O th e r th in g s e q u al, dep o sit in su ran ce
encourag es b an k s to h o ld riskier portfolios th a n they
Digitized4for FRASER
Table 1
Insured Deposits, 1934-1987
Y ear*
M aximum
Dollar
Insurance
Coverage
Per Account
1934-39
1940-44
1945-49
1950-54
5,000
5,000
5,000
10,000
1955-59
1960-64
1965-69
1970-74
1975-79
1980
1981
1982
1983
1984
10,000
10,000
15,000
24,000
40,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
1985
1986
1987
D eposits in
Insured B anks1
(in millions o f dollars)
T otal
Deposits
48,662
94,536
153,994
186,232
229,432
300,326
442,915
690,630
1,048,224
1,324,463
1,409,322
1,544,697
1,690,576
1,806,520
1,974,512
2,167,596
2,201,549
Insured
Deposits
21,815
38,512
73,789
101,299
128,854
169,874
262,955
425,963
691,832
948,717
988,898
1,134,221
1,268,332
1,389,874
1,503,393
1,634,302
1,658,802
Percentage
of Insured
Deposits
44.8
40.7
47.9
54.4
56.2
56.6
59.4
61.7
66.0
71.6
70.2
73.4
75.0
76.9
76.1
75.4
75.3
deposits in foreign branches are omitted from totals because they are
not insured. Insured deposits are estimated by applying to deposits at
the regular Call dates the percentages as determined from the June Call
Report submitted by insured banks.
Source: Annual Report of Federal Deposits Insurance Corp. 1987.
*Data reported for the years 1934-1979 are annual averages.
otherw ise w ould. T h is follows im m ed ia tely from th e p ro te c
tio n p ro v id ed by F D IC insurance: once insured, depositors
have no reason to w orry a b o u t th e riskiness o f th e ir b a n k ’s
activities. R egardless of how th e b a n k invests th e ir funds,
insured depositors’ claim s are g u a ran tee d . D epositors, th e re
fore, do n o t re q u ire a risk p re m iu m ; a n d banks, therefore,
h av e a n in centive to invest in riskier projects. If these riskier
p ro jects a re successful, th e b a n k ow ners re a p th e h ig h e r
returns; if not, the go v ern m en t in su rin g agency bears m ost
o f th e loss. D ep o sito rs’ funds e a rn th e safe ra te o f re tu rn a n d
are secure in e ith e r case.4
ne m ig h t q u estio n w h e th e r th e m o ral h a z a rd p ro b
lem is really th a t serious in b a n k in g because b an k
ow ners a n d m a n a g e rs a re n o t p ro te c te d by deposit
in su ra n c e — depositors are. In d eed , th e ow ners ca n lose th e ir
eq u ity if th e b a n k ’s loans go sour, a n d m a n a g e rs can lose
th e ir jobs. S u ch losses, th erefore, w ould seem to offset the
effects o f m o ral h a z a rd .
T h is view , a lth o u g h in tu itiv ely ap p ealin g , misses the
p o in t. E q u ity is a n in te g ra l p a r t o f th e m o ra l h a z a rd p ro b
lem , a n d th e o w ners o f th e b a n k a re th e ones w ho b enefit
from h a v in g a h ig h - r e tu r n /h ig h - r is k p o rtfo lio . M o re
over, som e b a n k ow ners a re a b le to diversify m u c h of this
risk by h a v in g only a sm all fractio n o f th e ir to ta l resources
invested in an y one ban k . C o n seq u en tly , ow ners could very
well b eh av e as if th ey w ere risk n eu tral; th a t is, th ey m ay
sim ply seek to m ax im ize e x p ected re tu rn . If this is th e case,
we w o u ld ex p ect such banks n o t ju st to tak e on m ore risk
th a n otherw ise, b u t in fact to seek as m u ch risk as possible.5
O
Moral Hazard K ept in C he ck
by P rotective S u b s id y . . .
P olicym akers w ere aw are o f m o ra l h a z a rd from th e b e g in
ning. H isto rically , th e response to this p ro b lem has been
heavy supervision a n d re g u la tio n o f b a n k in g activities. T his
a p p ro a c h m itig ates th e m o ra l h a z a rd p ro b lem in tw o ways:
first, by lim itin g risky b a n k activities, a n d second, by p ro
te ctin g ban k s from com petition.
D irec t lim ita tio n s of risky activ ities have tak en a v ariety
o f form s. F o r ex am p le, b a n k risk is m o n ito re d by th re e
fed eral agencies a n d each s ta te ’s c h a rte rin g a u th o rity .
N a tio n a l b an k s a re e x am in ed reg u larly by th e C o m p tro ller
o f th e C u rre n c y ; sta te -c h a rte re d b an k s a re ex am in ed by the
F D IC o r th e F e d e ra l R eserve (if th ey are a m em b er), as well
as th e sta te in w h ich th ey a re c h a rte re d . A ll b a n k h o ld in g
co m p an ies a re ex a m in e d by th e F e d e ra l R eserve. Besides
form al exam in atio n s, b anks hav e been restricted in the types
of businesses th ey can ow n a n d o p e ra te , in how m u ch
le n d in g th ey c a n do w ith o ne p erson o r one co m p an y , in
w h a t types o f loans th ey can m ake, a n d in how m u ch of th e ir
portfolio m u st be in liq u id reserves.
R e g u la to ry im p ed im en ts to b an k co m p etitio n have
in c lu d ed c o n stra in ts on th e n u m b e r o f b a n k ch arters, on
w h ere b an k s c o u ld do business, on how m a n y b ra n c h offices
ban k s co u ld m a in ta in , a n d on th e in terest rates b an k s co uld
pay. In a d d itio n , n o n b a n k fin an cial firm s w ere p ro h ib ite d
from offering tra d itio n a l b a n k p roducts.
H o w successful has this strategy been in lim iting the
effects o f m o ral h az ard ? U n til recently, the record looked
q u ite good, a n d banks a p p e a re d as safe as the governm entinsured deposits they offered. O v e r th e 40-year p eriod 1940
to 1979, for exam ple, on averag e less th a n seven banks failed
p e r y ear. (See T a b le 2.) In fact, th e re w ere so few failures
th a t m a n y econom ists a rg u e d th a t th e governm ent was
o v er-reg u la tin g banks. T h e y claim ed th a t banking, like
o th e r industries, n eed ed to w eed o u t its inefficient firms.
W h a t w as lost in efficiency, th o u g h , w as gained in safety.
W ith relativ ely few exceptions, th e U .S. ban k in g industry
a p p e a re d safe a n d sound.
T h e m ost effective p a r t of this supervisory an d reg u
la to ry strategy w as to isolate th e ban k in g industry from
c o m p etitio n , allow ing it to e a rn h igh rates of re tu rn . Banks
them selves w ere confined to w ell-specified geographic loca
tions via in terstate a n d in tra sta te b ra n c h in g restrictions.
A n d n o n b a n k fin an c ial firm s co uld n ot offer tran sac tio n
accounts. In a d d itio n , for m a n y years banks w ere p ro h ib ited
from p a y in g interest on checkable deposits a n d lim ited in
th e ra tes th e y co u ld p ay on tim e a n d savings accounts
(R eg u la tio n Q ). W ith few co m p etito rs an d few restrictions
on th e rates b an k s co uld c h a rg e on loans a n d e a rn on
investm ents, b a n k in g was a lu crativ e business even w ith o u t
ta k in g m u c h risk. S h o rt-te rm , self-liquidating com m ercial
loans a n d w ell-collateralized, lo n g -term loans, along w ith
g o v e rn m e n t securities, w ere th e sta n d a rd type of b a n k
assets.6
T h ese h ig h rates of re tu rn , as reflected in th e m a rk e t
v alu e o f a b a n k ch a rte r, p resu m ab ly provided th e b a n k w ith
a stro n g disincentive to tak e on too m uch risk. W hile the
b a n k co u ld have e a rn e d m ore by ta k in g on m ore risk, the
cost o f b a n k ru p tc y was su b stan tial; th a t is, the cost of losing
a b a n k c h a rte r m ay have far o u tw eighed th e gain from a
risky portfolio strategy. T h e v alu e o f a b a n k ’s ch a rte r,
therefore, reflected th e subsidy th a t was the quid pro quo for
n o t ta k in g too m u c h risk. T h is p ro tec tiv e subsidy effectively
reversed th e risk -re tu rn tra d e o ff facing the banker. T h e
subsidy w as h igh en o u g h so th a t in c u rrin g m ore risk w ould
low er— n o t raise— th e b a n k e r’s expected return.
T h e p ro tectiv e subsidy w as th e cost of successfully
c o n ta in in g m o ral h a z a rd in b anking. T his cost was m a n i
fested by th e lack o f co m p etitio n in b a n k services. W h a t has
been lab eled 3 /6 / 3 b a n k in g c h ara cterize d the in d u stry for
d ec ad e s— b o rro w a t 3 p erce n t, len d a t 6 percent, a n d be on
th e g olf course by 3 p .m .— a good life th a t p re su m a b ly few
5
w ere w illing to risk losing, despite th e incentives c re a te d by
deposit in su ra n c e .7
— But the Protective Subsidy
Has Been Eroded by Com petition
Since 1980 th e p ro te c tiv e subsidy a p p e a rs to h av e lost its
effectiveness. O v e r 800 b an k s have failed, 522 in th e last
th ree years. A n d a sig nificant p a r t o f th e savings a n d loan
industry, first-cousin to b an k in g , is facin g b a n k ru p tc y .
(A ccording to u n p u b lish e d F e d e ra l H o m e L o an B ank
reports, o n J u n e 30, 1988, 16 p e rc e n t o f all savings a n d loans
w ere b a n k ru p t on a n a d ju ste d re g u la to ry c a p ita l basis.)
T a b le 2 c le a rly illu s tra te s th e p ro b le m t h a t beset
th e b a n k in g in d u stry in th e ’80s. As n o te d ea rlier, from
1940-79, this c o u n try av e ra g e d less th a n seven b a n k failures
p e r year. By co n trast, from 1980-88, a n av erag e of a b o u t
92 banks failed p e r year. T h e d a ta also suggest th a t m ost
failures p rio r to 1980 invo lv ed relativ ely sm all banks.
B eginning in 1980 th a t w as no lo n g e r tru e , a n d in fact a
few of th e larg est b an k s w ere g e ttin g in tro u b le. F o r
exam ple, from 1945-54, to ta l assets o f closed b an ks a v e r
aged a b o u t $5.8 m illio n a n n u a lly . F ro m 1980-87, to ta l
assets of closed b an k s a v e ra g e d a b o u t S6.2 billio n an n u ally .
T h e figures for deposits o f closed b anks tell th e sam e story.
O f course, p a r t o f th e in crease in failed b a n k assets a n d
liabilities sim ply reflects th e effects o f inflation. B ut, some of
the largest p ro b le m b an k s in th e 1980s w ere reo rg an ized
w ith go v ern m en t assistance, a n d th u s are n o t in clu d ed in the
T ab le 2 d a ta .
W
h a t w e n t w rong? W h y h a d a p rev io u sly w ellm a n a g e d p ro b le m becom e difficult to control?
W h a t h a d h a p p e n e d to th e p ro te c tiv e subsidy?
T hese are co m p lex q u estio n s th a t we m a y n o t be ab le to
answ er satisfactorily for m a n y years. N evertheless, a t least
p a rt of th e e x p la n a tio n is c le a r now . T h e d o u b le -d ig it
inflation ex p erien ced in th e 1970s o p en ed th e d o o r to
n o n b an k c o m p e titio n a n d w ith in a few years ero d ed th e
value of b a n k ch arters.
C o m p e titio n from n o n b a n k fin a n c ia l firm s c am e q u ic k
ly on th e heels o f inflation. W ith h ig h e r ra te s o f in flatio n
cam e h ig h e r rates o f in terest. O n c e m a rk e t rates exceeded
th e m ax im u m rates b anks co u ld offer th e ir depositors, a host
of n o n b a n k c o m p etito rs em erg ed . T h rift in stitu tio n s w ere
am o n g th e first to challen g e th e co m m ercial b a n k s’ m o n o p
oly on tra n sa c tio n acco u n ts. U n til th e m id-1970s it w as easy
Digitized for
6 FRASER
for th e p u b lic to differen tiate b an k s from thrifts. Banks
offered checking accounts a n d savings accounts; the thrifts
offered only savings accounts. In 1972, how ever, tw o N ew
E n g la n d states p e rm itte d th e ir m u tu a l savings b anks to offer
a checking deposit th a t b ecam e know n as th e N O W acco u n t
(N egotiable O rd e r of W ith d ra w a l). S everal im p o rta n t co u rt
decisions su p p o rte d th e view th a t banks could n ot be
g ra n te d a m o nopoly on th e issue o f th re e -p a rty n eg otiable
in stru m en ts p a y ab le u p o n d e m a n d (i.e., checks). W hile
th e re w ere initially lim itatio n s on w ith d raw als, these N O W
accounts, unlike d e m a n d deposits a t banks, p a id interest.
N ot surprisingly, they w ere a n o v ern ig h t success, as is clearly
show n in T a b le 3. B etw een 1976 a n d 1981 N O W accounts
Table 2
Number, Deposits and Assets of Insured Banks
Closed Because of Financial Difficulties, 1934-1988
(in millions o f dollars)
Y ear*
Banks
Closed
1934-39
52.5
49
57
1940-44
17.0
41
47
1945-49
3.0
6
6
1950-54
3.0
6
1955-59
3.2
12
9
1960-64
13
17
1965-69
3.2
5.6
44
52
1970-74
4.8
551
1,083
1975-79
10.4
475
564
10
216
236
1980
T o tal
Deposits
T otal
Assets
8
1981
10
3,826
4.859
1982
1983
42
48
9,908
11,632
5,442
7,027
1984
79
2,883
3,276
1985
120
8,059
8,741
1986
138
6,471
6,992
1987
184
6,282
6,851
1988
200
n.a.
n.a.
Source: Federal Deposit Insurance Corporation.
*Data reported for the years 1934-1979 are annual averages.
grew from S2.7 b illion to $78.5 billion. O v e r th e sam e period
d e m a n d deposits a t b anks increased only a b o u t 5 percent.
A b o u t th e sam e tim e, th e larg e b ro k erag e houses saw
o p p o rtu n itie s in this a re a a n d b e g a n to offer m oney m ark e t
m u tu a l funds. In th e la te 1970s th e y a d d e d ch eck w ritin g
privileges. T y p ic a lly , these m oney m a rk e t acco u n ts c a rried
a h ig h e r ra te o f in terest th a n N O W acco u n ts b u t h a d m ore
restriction s o n w ith d raw als. T a b le 3 illu strates th e success of
these funds, w h ich grew from S3.4 b illion in 1976 to over
S I88 billio n by 1981.
N ew c o m p e titio n h it b a n k in g from th e asset side of the
business as w ell as th e lia b ility side. In th e 1970s, foreign
co m m erc ia l b an k s b e g a n c a p tu rin g a grow ing sh are of the
U .S. co m m ercial lo an business. M a n y large c o rp o ratio n s
a b a n d o n e d b anks for th e ir b o rro w in g needs by going
d irectly to th e co m m ercial p a p e r m ark et. A n d n o n fin an cial
firm s such as th e a u to m a n u fa c tu re rs a n d larg e retailers
b eg an a c o n c e rte d effort to e x p a n d th e ir sh are of the
con su m er lo a n m arkets.
T h is in creased c o m p e titio n d id n o t go u n n o tic e d by the
Table 3
Bank Demand Deposits and Substitute Instruments
1976-1987 (in millions o f dollars)
Y ear
Demand Deposits
a t Banks
NOW
A ccounts
1976
231,300
1977
247,000
5,000
3,800
1978
261,500
8,400
10,200
1979
270,100
17,000
42,900
1980
274,700
27,400
76,600
1981
243,400
78,500
188,600
1982
246,200
104,100
236,300
1983
251,000
132,200
181,400
1984
253,000
148,200
230,200
1985
276,900
180,900
241,000
1986
314,400
237,300
292,400
1987
298,500
261,600
310,700
2,700
Source: Federal Reserve Bulletin, various dates.
M oney M arket
M u tu al Funds
3,400
policym akers. T o allow banks to com pete on a m ore equal
basis, C ongress passed th e D epository Institutions D ereg u la
tio n a n d M o n e ta ry C o n tro l A ct of 1980 (D ID M C A ), w hich
called for th e m ost ra d ica l changes in ban k in g regulation
since th e 1930s. T h e a c t co n ta in e d several m ajo r provisions
designed to allow banks to com pete m ore effectively w ith
th e ir n o n b a n k co m petitors. In te re st ra te ceilings on b an k
deposits w ere to be ph ased o u t over th e next several years,
a n d federal reserve re q u ire m e n ts w ere low ered across the
b o a rd a n d im posed on all in stitu tio n s offering insured
tra n sa c tio n accounts. (T o allow th e savings an d loan
in d u stry to c o m p ete, C ongress passed th e G arn -S t G erm ain
D epository A ct o f 1982 w hich allow ed a savings a n d loan to
m ake co m m ercial loans as w ell as hom e m ortgages.)
In a d d itio n to D ID M C A , reg u lato rs ex p an d ed allow
ab le b a n k activities. M a n y states p erm itte d th e ir statec h a rte re d b an k s to ow n subsidiaries in o th e r lines of
business. T h e F ed eral R eserve also w as m ore lenient w ith
b a n k h o ld in g co m p an y activities, a n d a n increasing n u m b er
o f securities activities w ere p e rm itte d .8
ll this co m p etitio n has h a d the expected effect on the
m a rk e t valu e of b a n k ch arters. Explicit c h a rte r
values a re n o t a v a ila b le, b u t th e y can be estim ated.
Since c h a rte r values are in clu d ed in th e m ark et value of
b a n k eq u ities a n d n ot in c lu d e d in th e book v alue (u n d er
s ta n d a rd ac c o u n tin g p rocedures), th e ratio of m ark et to
book reflects to som e e x te n t th e v alu e of a b a n k ch a rte r. As
show n in F ig u re 1, a n d as ex p ec te d , th e m a rk e t valu e of
b a n k eq u ities exceeded th e book valu e from th e early 1950s
u n til th e e arly 1970s w h en th e ra tio b eg a n to decline. By the
m id-1970s, m a rk e t v alu e a c tu a lly fell below book value,
w here it rem ain s today. O f course, c h a rte r values can never
fall below zero a n d , therefore, th e re m ust be some o th e r
reasons w hy b a n k equities hav e been selling a t such low
prices. M o st p ro b a b ly , this is d u e to a n o v e rsta tem en t of
som e b ook assets d ue to u n re a liz e d lo an losses. N evertheless,
several rece n t studies h av e d o c u m e n te d the decline in b an k
c h a rte r values, a n d one has p resen ted evidence th a t banks
w ith belo w -av erag e c h a rte r values have above-average
w illingness to tak e risk (K eeley [1988]).
In su m m ary , as b a n k in g becam e less p ro te cte d from
co m p e titio n a n d less re g u late d , th e incentive to take on risk
increased. M o ra l h a z a rd , long la te n t, sta rte d to be a force
a n d th e results w ere as expected: ban k s b eg an rea ch in g for
profits by re a c h in g for risk. E v en th o u g h banks c o n tin u e d to
A
7
Figure 1
Ratio of Market Value of Equity
to Book Value of Equity, 1952-1987
The 25 largest bank holding companies.
Data provided by Federal Reserve Bank of San Francisco.
be m o n ito re d a n d supervised by a p le th o ra o f g o v ern m en t
agencies, such re g u la tio n p ro v ed ineffective in th e face of
increased c o m p e titio n a n d th e loss o f th e p ro te c tiv e subsidy.
W ith inflation, co m p etitio n , d e re g u la tio n a n d th e resulting
decline in th e p ro tectiv e subsidy, m o ra l h a z a rd has e m erged
as a serious concern. A ddressing this p ro b lem is n e ith er
going to be easy n o r inexpensive. T h e a p p ro a c h w hich
ap p ea rs th e m ost logical, reim p o sin g th e re g u la to ry stru c
tu re th a t p ro d u c e d th e h alc y o n years before d e re g u la tio n , is
not realistic. O n c e th e doors to c o m p e titio n are o pened,
closing th e m is ex trem ely difficult. It w o u ld re q u ire a severe
re tren ch m en t o f th e e n tire fin an cial industry.
A realistic solution req u ires som e reco g n itio n o f the
trad e o ff b etw een th e tw o in h e re n t problem s: th e in stability
in deposit b a n k in g versus th e m o ra l h a z a rd in deposit
insurance. T h is tra d e o ff c a n n o t be ignored. A v o id in g m o ral
h a z a rd is difficult if deposits are insured, a n d av oiding
depositor in sta b ility is difficult if th e y ’re not. Because o f this
tradeoff, th e re are no p erfect o r easy answ ers to e ith er
p roblem . T h e first-best solution is sim ply u n a tta in a b le .
Policy proposals w hich claim to have first-best solutions are
sim ply m isguided. N evertheless, th e re is a m u ch b e tte r
answ er th a n o u r c u rre n t re g u lato ry fram ew ork.
T o b e tte r u n d e rsta n d th e choices facing policym akers,
co n sid er th e tw o p o la r options: full-coverage insu ran ce
(w here all deposits are fully p ro tec ted ), o r none a t all. T h e
fo rm er elim in ates instability, b u t results in m o ral h a z a rd in
th e extrem e. T h e policies we have in place to d ay a re closest
to this option. T h e la tte r o p tio n elim inates m o ral h a z a rd ,
b u t results in d e p o sito r in sta b ility in th e extrem e. T h is was
th e policy before 1934, b u t as n o ted , th e b a n k in g system was
subject to p eriodic panics.
H a v in g seen th e results o f these p o la r options, we th in k
n e ith e r is co rrect. R a th e r, th e best policy solution lies
som ew here betw een these altern ativ es. Before p resen tin g
o u r co n ce p t of w h a t such a m o re m o d e ra te system m ig h t
e n ta il, how ever, we first discuss som e rece n t reform p ro
posals th a t we view to be ineffective, extrem ely costly or
b o th .-T h e se in clu d e 100 p e rc e n t reserve b an k in g , closing
b anks before th ey fail, a n d risk -ad ju stin g c a p ita l o r in su r
an ce p rem iu m s. T h e n , we tu r n to proposals th a t we th in k
are b etter.
100 Percent Reserve Banking
O n e p ro p o sal th a t has been a ro u n d a t least as long as deposit
in su ran ce is 100 p e rc e n t reserve b an k in g . K n o w n to d ay as
th e n a rro w b a n k in g co n cep t, it takes th e re g u la tio n of
b a n k in g to its v ery lim it.9 U n d e r n a rro w b a n k in g , banks
co uld only invest in safe, liq u id assets. (H o ld in g 100 p erc en t
cash reserves w o u ld o bviously satisfy this re q u ire m e n t.) T h e
n a rro w b a n k in g c o n cep t w ould also allow b an k s to hold
sh o rt-te rm T re a su ry d e b t as w ell as n o n in te re st-b e a rin g
reserves. O n th e surface, this p ro p o sal a p p e a rs to solve b o th
th e m o ra l h a z a rd p ro b le m a n d th e d ep o sito r in stab ility
p ro b le m a t once. M o ra l h a z a rd is sim ply re g u la te d aw ay
b ecause b an k s c a n n o t invest in risky assets. In sta b ility is
overcom e b ecause deposits a re 100 p e rc e n t b ack ed by safe
assets— th e re is no reaso n for depositors to lose co nfidence or
to ever fear a b a n k failure.
A p p e a ra n c e s are deceptive. W h ile th e n a rro w banks
w o u ld be safe, w h a t w o u ld h a p p e n to all th e in te rm e d ia tio n
(th a t is, m a tc h in g o f b o rro w ers a n d lenders) th a t th e y d id
previously as “ w ide b an k s” ? In te rm e d ia tio n services w ould
still be d e m a n d e d , a n d p re su m a b ly o th e r fin an cial in stitu
tions w o u ld fill th e g a p — o p e ra tin g m u c h like th e old w ide
banks. As such, th e new in stitu tio n s w o u ld be p ro n e to
dep o sito r in sta b ility if th ey w ere n o t insured a n d m o ral
h a z a rd if th e y were. T h e p ro b lem , in o th e r w ords, w ould not
be solved b u t only shifted to a d ifferent p a r t o f th e fin ancial
sector. A n d if th e re g u la to rs w ere ab le to p re v e n t this
shifting, m ost o f th e b o rro w in g a n d le n d in g th a t was
h isto rically p erfo rm ed by b an k s w o u ld be e lim in a te d , a cost
th a t w o u ld surely exceed th e benefits o f n a rro w banking.
Closing Banks Before T h e y Fail
A n o th e r p ro p o sal th a t looks like it w o u ld solve b o th m o ral
h a z a rd a n d in stab ility w ith very little cost is to close
tro u b le d b an k s before th ey go b a n k ru p t (S hadow F in a n cia l
R e g u la to ry C o m m ittee, 1988). T h e id ea h ere is th a t if banks
a re closed w h e n th e ir n e t w o rth is close to zero, th e in su re r’s
exposu re (th e a d m in istra tiv e costs o f closing th e b a n k a n d
selling its assets) is relativ ely sm all. P resu m ab ly , if banks
know th e y w ill be closed th a t q u ick ly , th e y w ill also be less
pro n e to ta k e risks. T h e m o ra l h a z a rd p ro b le m th e n is solved
(since th e F D IC n ev er takes losses) a n d d ep o sito rs’ funds are
alw ays safe.10
L ike th e n a rro w b a n k in g p ro p o sal, th e costs o f such an
a rra n g e m e n t are m u c h g re a te r th a n th e y m ig h t a p p e a r. I t ’s
one th in g to say tro u b le d b an k s sh o u ld be closed before they
are b a n k ru p t, b u t a n o th e r to p u t this p rinciple into
p ra c tic e — th a t is, to d e te rm in e precisely w hen any p a rtic
u la r b a n k should be closed. R eg u la to rs cu rren tly m o n ito r
th e n et w o rth o f banks; th ro u g h call reports a n d form al b an k
ex a m in a tio n s th ey d e te rm in e th e n et w o rth of banks a t least
fo u r tim es a y ear, a n expensive process. A nd even these d a ta
are subject to errors. E v a lu a tin g th e valu e of assets th a t are
n ot tra d e d in a secondary m a rk e t (such as m ost com m ercial
loans) is o p en to co n sid erab le u n c e rta in ty a n d som etim es
q u ite a rb itra ry . U n d e r th e p ro p o sal to close banks quickly,
one w o u ld h av e to m o n ito r banks m ore frequently a n d m ore
a c c u ra te ly th a n we now do, a n d th e costs could well be
p ro hibitive.
u rth e r, th e in fo rm atio n p ro b lem is m ore com plex
th a n id en tify in g lo w -q u ality loans. By th e very
n a tu re o f b an k in g , m a n y loans are w o rth relatively
little if sold on th e m a rk e t to d a y , b u t are in fact good loans
w ith h igh fu tu re payouts. O n ly if reg u lato rs w ere able to
g a th e r th e sam e q u ality o f in fo rm atio n th e banks have could
th e y m ake th e d istin ctio n betw een sh o rt-ru n a n d lo n g -ru n
values. T h is w o u ld not only be expensive, b u t inefficient as
w ell because it w ould e n ta il a rep lic atio n of in form ation
costs th a t banks have a lrea d y in c u rre d .11
F
Risk-Adjusted Insurance Prem ium s
or Risk-Adjusted Capital Requirements
R isk -ad ju sted insu ran ce p rem iu m s o r risk-adjusted ca p ita l
re q u ire m e n ts are proposals th a t also a p p e a r to solve the
m o ra l h a z a rd p ro b le m w hile keeping deposits safe. In
ad d itio n , these proposals a p p e a r to be m a rk e t-o rien ted , for
p resu m a b ly p riv a te insurers w ould charge th e ir riskier
custom ers a h ig h er p re m iu m o r req u ire larg e r deductibles.
O n closer ex a m in a tio n , how ever, th e costs of effectively
ad m in iste rin g such policies w ould likely be p rohibitive,
even for p riv a te insurers.
T o a d m in iste r a risk -ad ju sted in su ran ce policy requires
som e w ay o f ac cu ra tely assessing risk. A nd ag ain , th e re is the
cost of som e v ery expensive in fo rm atio n . W h a t do p riv a te
in su ra n ce c o m p an ies do in this situation? In p ra ctice , in
su ran ce co m panies generally engage in lim ited m o n ito rin g
o f risk beh av io r. P hysical ex am in atio n s, driv ers’ tests an d
p ro p e rty inspections are typically req u ire d before th e in
su ran ce is g ra n te d , b u t ra rely will th e in su rer co n tin u ally
m o n ito r th e h e a lth o f a p a tie n t o r th e co n d itio n o f a factory.
G iven th e cost o f m o n ito rin g , it is likely th a t p riv a te insurers
9
of banks would not operate much differently. Regular mon
itoring of banks’ behavior toward risk is labor-intensive and
expensive. And even if the risk could be measured accu
rately, pricing this risk without market data on the value of
bank loans would be difficult and arbitrary.
That is not to say some broad-risk categories could not
be established and priced (as age is used, for example, with
health and auto insurance). Indeed, the new capital stan
dards established under the Basle Agreements of 1988
feature this sort of rough-and-ready risk categorization.12
While the new capital standards are surely an improvement
over the old, there are still continuing problems. For one
thing, by definition, they favor bank investment in some
asset categories over others. There is always the danger that
these standards may become politicized (here, or in other
countries), which could result in a significant misallocation
of resources. Moreover, the new capital standards invite
loophole exploitation on the part of banks, which have a
natural incentive to find (or create) assets which have had
their true risk underestimated. In fact, this process is already
beginning, and the effectiveness of the capital standards will
depend substantially on the authorities’ zeal in finding and
plugging loopholes. This approach will not help much with
the moral hazard problem. Too many arbitrary decisions
have to be made, and too many loopholes have to be closed.
Need to Rely More on
Private Market Involvem ent
We have questioned those proposals that don’t face up to the
tradeoff between moral hazard and depositor instability.
Each of the above proposals attempts to reduce moral haz
ard without affecting the safety of bank deposits. That is not
possible, at least not at any reasonable cost. These proposals
either require exorbitant information costs or don’t, in fact,
avoid the tradeoff. An effective solution must recognize that
there is a tradeoff. The current state of the system is near one
extreme; it minimizes the possibility of bank runs at the
expense of maximum moral hazard. Since there appears to
be no panacea, the tradeoff necessarily means accepting
somewhat more depositor instability than is now the case.
The problem, then, is to reform deposit insurance so
that there is a better balance between moral hazard and
depositor instability. Because the private market tends to
allocate resources efficiently, the way to do this is to redesign
deposit insurance so that it incorporates features found in
most private insurance contracts—higher deductibles and
10FRASER
Digitized for
some degree of co-insurance. This in turn will mean more
market discipline of banks and private bearing of risk.
Increasing the Deductible
The deductible is one way most insurance contracts are
designed to limit the insurance com pany’s loss. Required
bank capital, at least from the FDIG’s point of view, is the
deductible in deposit insurance—the higher the capital, the
lower the FDIC’s exposure.
Raising capital requirements would also help to reduce
moral hazard. It would do this in two ways, and the first is
fairly obvious. To the extent that bank owners are riskaverse and cannot completely diversify their investments,
more capital helps to offset the incentive to risk-taking
because owners have more at stake. The second effect is less
direct and considerably more subtle. Other things equal, a
higher capital requirement will reduce the expected losses of
the FDIG, effectively reducing the net subsidy to banking
due to deposit insurance. Reducing this subsidy will cause
some shrinkage of the banking industry—either as banks cut
back on marginally profitable lending or as marginally
profitable banks are driven out of business. To the extent the
industry is made smaller as the insurance subsidy is reduced,
so is the moral-hazard problem.
Furthermore, raising capital requirements will bring
capital-asset ratios closer to their pre-deposit insurance
levels, levels that presumably reflect a more prudent
amount of bank capital. Consider the historical bank capital
ratios shown in Figure 2. Before 1933, banks held much
more capital than they now do. In fact, from 1844 to 1900,
average capital ratios exceeded 20 percent o f assets. In
recent years, the average has been around 6 percent. Figure
3 shows contemporary capital ratios for banks (actually
consolidated bank holding companies) in comparison with
other financial intermediary firms in different industries.
The other industries are generally less regulated than
banking and none have deposit insurance. The capital ratios
o f the nonbank firms are in all cases much higher than in
banking. Both data comparisons suggest that were it not for
deposit insurance, banks would most likely hold much more
capital.
Establishing Co-Insurance
In searching for other ways to mimic a private-market
solution to moral hazard, we found an answer in coinsurance.13 This technique is often used by private insur-
Figure 2
Commercial Banking Industry Capital/Assets Ratio: 1834-1986
Notes: Series (1) and (2) are from Historical Statistics o f the United States Colonial Times to 1970. U.S. Dept, of Commerce, USGPO,
1975 which provides a detailed discussion of these data. Series (3) is obtained from the Federal Reserve Bulletin, and FD IC Annual
Statistics, various dates. The definition of the capital account has changed somewhat over time, and it is not possible to construct
an absolutely consistent series from 1834 to the present. Generally, however, the capital account includes capital, surplus, net
undivided profits, reserves for contingencies, and certain other reserve accounts.
Figure 3
Median Ratio of Equity to Assets, 1971-1984
Bank Holding Companies and Other Financial Firms
BHC
Securities
Life
Insurance
Property/
Casualty
Insurance
Note: Average ratios are computed for each firm: Medians are reported for each industry.
Source: Boyd and Graham (1988, p. 12)
Insurance
Agents
an c e co m p an ies to c o n tro l m o ra l h a z a rd . It m akes th e
in su re d b e a r som e o f th e cost of a b a d outcom e a n d
e n co u rag es safe b e h av io r. In b an k in g , this will m ean some
loss o f d e p o sito r confidence, since only a p ercen tag e of
d eposits w o u ld be in su red. T h e tradeoff, as we have n oted,
how ever, is u n a v o id a b le . A t least w ith co-insurance the
tra d e o ff w o u ld be m a d e ex p licit an d th e ab ility to m an age
th e tra d e o ff should be e n h a n c e d .
In m a n y p riv a te in su ra n c e a rra n g e m en ts th ere is at least
som e risk -sh arin g , w h ich c a n ta k e a v ariety o f form s, b u t the
m ost ty p ic a l is c o -in su ran ce. W ith m ed ical insurance, for
ex am p le , th e in su red (after som e dedu ctib le) m ay be
co v ered for o n ly 90 p e rc e n t o f expenses. T h e incentives
c re a te d by such co -in su ra n c e a re obvious. T h e insured are
m o re likely to c o n sid er th e costs of m edical problem s. J u st as
im p o rta n t, th e incentives e n c o u rag e th e insured to consider
h e a lth p ro g ra m s th a t re d u c e th e need for m ed ical care in the
first place.
T w o m a jo r ad v a n tag e s exist in a d o p tin g co-insurance
o ver sim ply p u ttin g te eth in th e present $100,000 lim it.
F irst, it is a very different situ atio n w hen all depositors suffer
sm all losses th a n it is w h en a few depositors suffer large
losses. T h e likelihood o f failures tra n sm itte d from one b a n k
to a n o th e r is g re atly red u ced . A n d second, m odifying th e
fo rm al stru c tu re o f th e d eposit in su ra n c e system w o u ld send
a stro n g m essage to th e m a rk e tp la c e (and, for th a t m a tte r, to
reg ulators) th a t a real ch an g e w as ta k in g place. J u s t
a n n o u n c in g a “ get to u g h ” policy u n d e r th e presen t in su r
ance system is a strategy th a t has been tried , w ith very
lim ited success.
this 100 p e rc e n t in su ra n c e lim it w ould a p p ly to the in d i
v id u als, n o t to acco u n ts. A n in d iv id u a l w ould be able to
identify only o n e a c c o u n t a n y w h e re th a t w ould have this
coverage, a n d a n y th in g o v er this lim it (and all funds in o th e r
accounts) w o u ld be subject to co-insurance.
Som e m ig h t a rg u e th a t if we sim ply enforced th e
in su ra n c e system we h a v e in p la c e to d ay , w ith its $100,000
ceiling, we c o u ld a ch iev e th e sam e result. O f th e billions of
d o llars in deposits, a b o u t 23 p e rc e n t are large, u n in su red
deposits. In p ra c tic e , h ow ever, reg u lato rs have been ex
tre m e ly re lu c ta n t to let these relatively few large depositors
b e a r th e b r u n t o f a b a n k fa ilu re — especially w hen m any of
th e m are, them selves, c o m m ercial banks.
W h ile such policies m ay in d eed m inim ize th e cost of any
p a rtic u la r b a n k closure, th ey do n ot necessarily rep resen t
th e best lo n g -ru n policy. T h a t’s because th e u n in su re d
d epositors w ill le a rn o ver tim e th a t, w h a te v e r is th e
a n n o u n c e d policy, th e ir deposits a re a c tu ally safe. W h en
th a t h ap p en s, “ u n in su re d depositors” no lo nger care a b o u t
b a n k risk a n d m a rk e t discipline is lost. C o n seq u en tly , th ere
a re m o re b a n k failures th a n th e re w ould h av e been, h a d
u n in su re d depositors n ot been p ro tected .
T im e inconsistency is also a p ro b le m in th e tre a tm e n t o f
large, tro u b le d banks. T h e c u rre n t a n n o u n c e d policy is th a t
all b a n k failures a re h a n d le d u n d e r th e sam e set of
regu latio n s a n d gen eral principles. B ut th e a n n o u n c e d
T im e Inconsistency: A P olicym aker’s Dilemma
T h e lim ite d success of th e get to u g h policy is sy m p to m atic of
a m ore gen eral p ro b lem . If co-in su ran ce is to m itig a te m o ra l
h a z a rd , policy m ak ers m u st c o n fro n t w h a t is kno w n as th e
“ tim e inconsistency” dilem m a: A policy th a t is best for th e
long ru n m a y n o t be best for th e sh o rt ru n , a n d v ice -v ersa .14
C o n sid er th e d ile m m a as it arises w ith deposit insurance.
o -in su ra n c e in b a n k in g w o u ld n ’t w ork exactly as it
I
does in th e h e a lth in d u stry , b u t th e in centive effectsO n c e a b a n k is on th e verge of failing, it often a p p e a rs th a t
th e best policy is to p ro te c t all depositors, b o th insured an d
w o u ld be sim ilar. If deposits w ere insured only u p to
u n in su re d . T h e F D IC c an p ro te c t all depositors by a r ra n g
90 p e rc e n t, for ex a m p le, all depositors w ould have an
ing th e p u rch ase a n d assu m p tio n of a tro u b le d b a n k by a
in te re st in th e fin a n c ia l h e a lth o f th e ir b an k . T o be c o m
h
e a lth y one. F o r decades this a p p ro a c h w as often used
p e titiv e w ith b an k s th a t h o ld relativ ely safe portfolios, b anks
b
ecause
it m in im ized th e F D IC ’s cost of h a n d lin g a failing
th a t chose risk ier p o rtfo lio s w o u ld have to offer th e ir
bank. T h is w as th e low -cost m eth o d , a t least p a rtly because
d ep o sito rs a h ig h e r ra te o f re tu rn . C o nsequently, because
in a p u rc h ase a n d assu m p tio n tra n sa c tio n th e c h a rte r v alue
risk w o u ld now be p riced , b an k s w ould have less incentive to
is c a p tu re d by th e F D IC . T h is a p p ro a c h (or p ublicly
choose such portfolios a n d th e m o ral h a z a rd p ro b lem w ould
a
n n o u n c in g th a t all depositors w ill be p ro tected ) has th e
be reduced.
a
d d itio n a l a d v a n ta g e th a t a c tu a l o r p o te n tia l b a n k ru n s are
C o -in su ra n c e c o u ld also be designed to to tally p ro tect
h a lte d , allo w in g th e re o rg a n iz a tio n to p ro ceed in a n ord e rly
sm all savers. F o r ex am p le, th e first S I0,000 o f savings could
m an n e r.
be 100 p e rc e n t in su red . T o a v o id th e b ro k erin g o f deposits,
12
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or "ihff
©TheNew York Times, 3 /6 / 8 9
Banks In a Label War
With Thrift Institutions
By NATHANIEL C. NASH
SpacktlI*TlwN«»Y«fhTi**»
WASHINGTON. March5 - Wh»t’»
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. ..i-i «_an*
some areas lend to avoid F.S.L. 1.Cinsured institutions and that, when
they do deposit their funds in S * L s.
they tend to demand hjaki ~w»tes of
interest.
consulted, the thinkiij
House evidently chai
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policy is clearly tim e-in co n sisten t, because regulators fear
th e fin an cial h av o c th a t c o u ld result if a large b a n k w ere
allow ed to fail. Q u ite p re d ic ta b ly , th e a n n o u n c e d policy has
n o t b een follow ed; a n d ju s t as p re d ic ta b ly , it is now w idely
p erce iv ed th a t all depo sito rs in large banks are fully
p ro te c te d u n d e r v irtu a lly all circum stances. T his m ark et
p e rc e p tio n confers a sig n ifican t (albeit u n in ten d ed ) co m
p etitiv e a d v a n ta g e on th e larg est banks.
F o r p re se n t purposes, th e p o in t is obvious. If coin su ra n c e is to be m a d e effective, it m ust be tim e-consistent.
T h a t is, th e a u th o ritie s m u st n o t p ro te c t th e u n in su red
p o rtio n o f d e p o sito rs’ ac c o u n ts, w h e th e r th e y ’re in sm all
b an k s o r larg e ones. W ith a system o f h ig h e r c a p ita l ratios
a n d co -in su ra n c e , h o w ev er, F D IC losses w ould be fewer
th a n w ith th e c u rre n t system . T hus, th e sh o rt-ru n cost
a d v a n ta g e o f p u rc h a se a n d assu m p tio n tran sactio n s w ould
be red u c e d . As fa r as failin g larg e b anks are concerned,
losses w o u ld be sp re a d across a w ide sp ectru m of depositors,
a n d n o t c o n c e n tra te d in a relativ ely few large, u n in su red
ones. O f course, an y d e p o sito r’s m ax im u m loss w ould be
b o u n d e d by th e co -in su ra n c e p ercen tag e lim it. T hus, th e
lik elih o o d o f c a ta s tro p h ic losses for a few depositors w ould
be g reatly red u ced .
P e rh a p s m o re im p o rta n t, m a rk e t discipline w ould w ork
b o th before a n d a fte r th e fact. By this we m ean th a t d e
positors w o u ld be m o re c arefu l, p ay in g some a tte n tio n to th e
fin an cial c o n d itio n o f th e ir b anks in good tim es as well as
b ad . In n et, th is w o u ld te n d to c o n c e n tra te deposits in
w ell-ru n , low er-risk in stitu tio n s, unlike th e p resent system.
S m alle r b an k s w o u ld be m o re careful a b o u t leaving b a l
ances o f several tim es th e ir c a p ita l in corresp o n d en ts, an d so
on. F o r all th ese reasons, th e d an g ers o f p e rm ittin g a large
b a n k failu re w o u ld be g re a tly reduced.
W e hav e a rg u e d th a t d ep o sit in su ran ce should be reform ed
to b e tte r reflect p riv a te in su ra n c e prin cip les a n d to e n
co u rag e m a rk e t discipline. T h is im plies m ore d irect m ark et
in v o lv em en t in b e a rin g b a n k risk. T h ro u g h h ig h e r d e d u c t
ibles (cap ital re q u ire m en ts) a n d co-insurance, shareholders
a n d d ep o sito rs w ill h av e a n in creased stake in th e soundness
o f th e ir banks.
T h is p ro p o sal has th e significant a d v a n ta g e o f g ra d u a l
im p le m e n ta tio n w ith m o d ificatio n to th e presen t system.
As Professor R o b e rt L u cas, U n iversity of C hicago, once
observed,
14
. . . a tte m p tin g v a rio u s policies th a t m ay be p ro p o se d on
a c tu a l econom ies a n d w a tc h in g th e o u tc o m e m u st n o t be
ta k e n as a serious solution m e th o d : Social e x p e rim en ts o n th e
g ra n d scale m a y be in stru c tiv e a n d a d m ira b le , b u t th ey are
best a d m ire d a t a distance. (L ucas, [1983, p. 288].)
O u r pro p o sed ch anges ca n be im p le m e n te d on a sm all scale
a n d carefully, th u s av o id in g th e obvious risks o f m assive
reg u lato ry u p h eav al. C a p ita l re q u ire m e n ts ca n be raised
g ra d u a lly a n d w ith a d v a n c e w a rn in g to th e in d u stry .
S im ilarly, co-in su ran ce can be p h ased in as deem ed a p p r o
p ria te . F o r ex am ple, we could a d o p t a system o f 100 p e rc e n t
deposit in su ran ce u p to S I0,000 a n d co -insurance for any
g re a te r deposit b alances, say 2 p e rc e n t th e first y e a r a n d
in cre asin g by a p e rc e n t o r so each y e a r afte r th a t. T h e p o in t
is, th e in itia l co-in su ran ce b u rd e n of depositors w ould be
sm all (raising th e ir risk consciousness a bit) b u t h a rd ly
re d u c in g th e ir insu ran ce coverage. A n im p o rta n t a n d
difficult q u estio n is: H ow larg e should th e fra ctio n a l coin su ra n ce b u rd e n of d epositors u ltim a te ly becom e? W e do
n o t p re te n d to know the answ er, a n d it will surely re q u ire an
analysis beyond th e scope o f this essay.
Who Would Gain and Who Would Lose
T h is proposal, even if fully successful in c o n ta in in g m o ral
h a z a rd a n d c o rre c tin g a p o te n tia lly costly p ro b lem , w ill n ot
necessarily benefit everyone. Som e will benefit m ore th a n
o thers, a n d som e w ill be w orse off th a n they are u n d e r th e
c u rre n t system. W ho w ould gain a n d w ho w ould lose? T hose
m ad e b e tte r off w ould include th e F D IC , th e tax p ay ers a n d
som e co m m ercial banks. T h e F D IC w ould be a n obvious
w in n er, since its insu ran ce liabilities w o u ld be directly
red u ced . H o w w ould this b en efit th e tax p ay ers? As th e U .S.
p u b lic is in th e process of p ain fu lly discovering, th e ta x
payers u ltim a te ly stan d b e h in d federal deposit insurance,
th e S I00 b illion e stim ated loss o f th e F S L IC b ein g a case in
po in t. Since o u r rec o m m en d ed changes w o u ld m ake th e
F D IC stro n g e r a n d less likely to becom e insolvent, all ta x
payers w ould benefit. M oreover, since a n essential aspect of
o u r pro p o sal is th a t all banks o p e ra te u n d e r th e sam e c a p ita l
a n d co -in surance rules— m e a n in g th a t no b a n k is too big to
fail— sm aller b a n k in g o rg an iz atio n s, w hich c u rre n tly are
co n fro n ted w ith u n fa ir a n d u n fo rtu n a te co m p etitio n , w ould
also benefit.
All banks w ould lose to th e ex te n t th e ex p ected losses of
th e F D IC w ere low ered, th u s red u c in g th e n et subsidy to th e
b a n k in g in d u stry . Banks, a n d o f course depositors, w ould
also lose th e b la n k e t in su ran ce p ro te c tio n now offered
depositors, m ak in g th e m less co m p etitiv e w ith th e m y riad of
u n in su re d savings instru m en ts. W ith a b e tte r system of
deposit in su ran ce in place, th o u g h , b a n k pow ers could be
ex p a n d e d w ith less co n cern a b o u t soundness issues, th a t is,
less co n c e rn th a t m o ral h a z a rd w as b ein g sp read to n o n b an k
lines o f business.
effects of m oral hazard. H ow ever, if bank owners genuinely w ant
m anagers to pursue high-risk strategies, it seems they can get th eir wish.
O ne obvious way is to pay m anagers sufficiently high current salaries to
offset their risk of loss should b a n k ru p tcy occur in the future.
n b a la n c e , th e benefits o f this p ro p o sal far o u tw eigh
th e costs. T h a t th e re will be costs a n d th a t they
c a n n o t be av oided should be clear. W e see no w ay to
m ake progress on m o ra l h a z a rd w ith o u t in creasing the
p o te n tia l for d ep o sito r instability. If th e experience in the
savings a n d loan in d u stry , how ever, is an y in d ic a tio n of th e
p o te n tia l p ro b lem s in b an k in g , som e tra d e o ff is w a rra n te d .
7T he protective subsidy notion is m ore fully discussed an d defend
ed in Benveniste, Boyd an d G reen b au m (1988).
6T he high potential earnings in com m ercial banking were u n
doubtedly dissipated, in part, by subsidizing loan rates and by non-price
com petition for depositors. But th e m onotonously low failure rate
through the 1970s strongly supports the notion th a t bank owners were
still doing well.
8C ontinuing this tren d , on J a n u a ry 18, 1989, the B oard of
G overnors ruled th a t five m ajo r ban k in g firms could underw rite and
deal in corporate debt. T h e B oard also indicated at th a t tim e th a t (if all
went well w ith d ebt underw riting) it w ould consider perm itting
banking concerns to underw rite corporate equities w ithin about a year.
In a previous decision (April 30, 1987), the B oard approved ap p lica
tions to underw rite com m ercial pap er, m ortgage-backed securities,
m unicipal revenue bonds a n d consum er-related receivables. Even
earlier, discount brokerage was determ in ed to be a perm issible activity
for banking organizations on J a n u a ry 7, 1983.
9100 percent reserve banking was proposed by Simons (1936) and
later by Friedm an (1959).
10In theory, at least, the incentive effects o f closing banks before
they fail are m uch like those of the protective subsidy.
Endnotes
'T h e point th at reform should logically precede further deregula
tion was forcefully m ade as early as 1983 by K areken.
2T his essay deals w ith bank regulation in general, an d the F ederal
Deposit Insurance C orporation (FDIC) in p articular. But, most of our
policy recom m endations w ould be equally applicable to the savings
and loan industry and their insurer, the FSLIC . W h at is not discussed
here is the cu rren t financial crisis of the FSLIC , a problem w hich is
(thankfully) unique to th a t institution.
3D ata for uninsured deposits in failed banks th a t were purchased
by other banks are not available. W e estim ate uninsured deposits as the
difference betw een total assets an d total insured deposits, based on the
assum ption th a t equity of failed banks is zero.
4T h e m oral h azard problem is, in fact, m ore extrem e w ith deposit
insurance th an it is with m any forms of private insurance. T h e FD IC
does not prohibit troubled banks from buying m ore insurance (that is,
acquiring m ore deposits). T his is analogous to allowing the owners of a
factory to buy m ore fire insurance when th eir factory is on fire.
5W hile bank stock owners m ay be able to effectively diversify their
risks, this is m uch m ore difficult for the senior m anagem ent of banks.
T h a t is so because w hen a b ank fails it m ay reflect on th eir skill as
m anagers, an d thus on the value of th eir h u m an capital. T his point is
sometimes raised as an im p o rtan t force countervailing the incentive
11W e are not suggesting th a t banks should be kept open w hen all
available inform ation indicates th a t the value of their liabilities exceeds
the value of their assets. T his policy invites end-gam ing strategies on the
p a rt of ban k ru p t institutions, an d is in large p a rt to blam e for the recent
losses of the FSLIC.
12In 1988, new cap ital guidelines were an n o u n ced for banks in the
U nited States and a n u m b e r of o th e r countries, p u rsu an t to an
international agreem ent in Basle, Sw itzerland. T h e Basle A greem ent
calls for m inim um capital of 7.25 p ercent of assets by the end of 1990
and 8 percent of assets by the end of 1992. T he new capital
requirem ents are risk-progressive, a t least in term s o f asset risk. Five risk
classes are established for assets a n d off-balance sheet items. E ach is
w eighted from 0 to 1.0 w ith cash a n d short-term U .S. T reasury bills
receiving the lowest w eight, w hereas most bank loans receive the
highest weight. All o th er assets are assigned weights of 0.1, 0.2, or 0.5,
depending on their assessed risk. F o r a detailed discussion of the Basle
A greem ent risk classifications, see F ederal Reserve System (1988).
13W e claim no originality for this proposal. In fact, it has some
historical precedent. C o-insurance was p a rt of the original deposit
insurance plan th at was to go into effect on Ju ly 1, 1934 (FD IC , p. 44).
D eposits up to SI 0,000 for each depositor were to be fully insured, over
$10,000 but u n d er $50,000 were to have 75 percent coverage, an d over
$50,000 only 50 p ercent coverage. T his plan, however, was superseded
by a new p lan th a t was p a rt of th e B anking A ct of 1935 w hich provided
only full coverage up to $5,000.
14T he seminal work on tim e inconsistency is K y d land and Prescott
(1977). For a less technical discussion of this problem , see C hari (1988).
15
Bibliography
Association of Reserve City Bankers. 1988. Beyond capital regulation:
Strengthening the FD IC insurance fund and systemic liquidity. R ecom
m endations of the Special Task Force, A sset/L iability Com m ittee
(M arch), Chicago.
Benveniste, L arry, J o h n H. Boyd a n d S tu art G reenbaum . 1988. Bank
capital regulation. M on o g rap h p repared for Association of R e
serve C ity Bankers, Banking R esearch Center, Conference on
Bank C ap ital Issues, Dec. 14-16, N orthw estern University,
Evanston, 111.
Boyd, J o h n H. and Stanley L. G rah am . 1988. T he profitability and risk
effects of allow ing b ank holding com panies to merge with other
financial firms: A sim ulation study. Quarterly Review, Federal
Reserve Bank of M inneapolis, (Spring): 3-20.
C hari, V .V . 1988. T im e consistency and optim al policy design.
Quarterly Review, F ederal R eserve Bank of M inneapolis, (Fall):
17-31.
Federal D eposit Insurance C orporation. 1984. The first fifty years.
W ashington, D.C.
Federal R eserve System. 1988. C apital; risk-based capital guidelines.
12C FR P a rt 225, A ppendix B. [R egulation Y; docket #R-0628].
F riedm an, M ilton. 1960. A Program fo r Monetary Stability. New York,
New York: F ordham U niversity Press.
F riedm an, M ilton an d A nna J . Schw artz. 1963. A monetary history o f the
United States, 1867-1960, P rinceton, New Jersey: University Press.
K areken, J o h n H. 1983. D eposit insurance reform or deregulation is
the c a rt not the horse. Quarterly Review, Federal Reserve Bank of
M inneapolis, (Spring): 1-9.
K eeley, M ichael C. 1988. D eposit insurance, risk, and m arket power in
banking. W orking P ap e r 88-07. Federal Reserve Bank of San
Francisco.
K ydland, Finn E. an d E dw ard C. Prescott. 1977. Rules rather than
discretion: T he inconsistency of optim al plans. Journal o f Political
Economy 85 (June): 473-91.
Lucas, R o b ert E., J r . 1981. Studies in Business-Cycle Theory. Cam bridge,
Mass: T he M IT Press.
Shadow F inancial R egulatory C om m ittee. An outline of a program for
deposit insurance reform . D ecem ber 5, 1988. Statem ent No. 38.
M id A m erica Institute for Public Policy Research, Chicago.
Simons, H enry. 1936. R ules versus authorities in m onetary policy.
Journal o f Political Economy 44 (February): 1-30.
16
F o r ad d itio n al copies contact:
P ublic Alfairs
F ed eral R eserve B ank of M inneapolis
M inneapolis, M innesota 55480
Statement of Condition
18
Earnings and Expenses
19
Directors
20
Officers
21
Statement off Condition (in thousands)
December 31,
1988
December 31,
1987
$168,000
66,000
11,291
11,884
$169,000
66,000
13,110
9,750
99,235
3,328,425
113,526
3,290,251
$3,427,660
$3,403,777
382,560
435,370
Assets
Gold Certificate Account
Special Drawing Rights Certificate Account
Coin
Loans to Depository Institutions
Securities:
Federal Agency Obligations
U.S. Government Securities
Total Securities
Cash Items in Process of Collection
Bank Premises and EquipmentLess: Depreciation of $27,704 and $24,533
Foreign Currencies
Other Assets
Interdistrict Settlement Fund
Total Assets
33,631
282,968
77,106
1,010,604
34,543
256,476
66,936
(2,890)
$5,471,704
$4,452,072
$4,124,053
$3,042,763
807,205
4,650
1,984
847,699
4,950
16,256
Liabilities
Federal Reserve Notes1
Deposits:
Depository Institutions
Foreign, Official Accounts
Other Deposits
Total Deposits
$813,839
$868,905
Deferred Credit Items
Other Liabilities
352,150
47,970
370,656
44,538
Total Liabilities
$5,338,012
$4,326,862
$66,846
66,846
$62,605
62,605
$133,692
$125,210
$5,471,704
$4,452,072
Capital Accounts
Capital Paid In
Surplus
Total Capital Accounts
Total Liabilities and Capital Accounts
Amount is net of notes held by the Bank of S804 million in 1988 and S992 million in 1987.
18
Earnings and Expenses (in thousands)
For the Year Ended December 31
1988
_____1987
$261,532
9,342
3,611
37,362
446
$240,914
11,348
2,553
36,599
7,920
$312,293
$299,334
$29,324
5,912
1,113
5,566
458
2,129
$27,437
5,256
1,001
5,653
497
1,887
2,334
1,078
812
1,267
2,267
1,065
734
1,426
613
4,768
2,300
6,931
2,558
1,713
687
4,600
2,085
6,083
2,896
1,613
$68,876
$65,187
Current Earnings
Interest on U.S. Government Securities and
Federal Agency Obligations
Interest on Foreign Currency Investments
Interest on Loans to Depository Institutions
Revenue from Priced Services
All Other Earnings
Total Current Earnings
Current Expenses
Salaries and Other Personnel Expenses
Retirement and Other Benefits
Travel
Postage and Shipping
Communications
Materials and Supplies
Building Expenses:
Real Estate Taxes
Depreciation—Bank Premises
Utilities
Rent and Other Building Expenses
Furniture and Operating Equipment:
Rentals
Depreciation and Miscellaneous Purchases
Repairs and Maintenance
Cost of Earnings Credits
Other Operating Expenses
Net Shared Costs Received from Other FR Banks
Total
Reimbursed Expenses2
(3,654)
(3,138)
$65,222
$62,049
$247,071
(16,711)
$237,285
58,626
2,596
2,368
4,004
217,151
2,649
2,480
3,694
285,618
$4,241
$1,470
Surplus, January 1
Transferred to Surplus—as above
$62,605
4,241
$61,135
1,470
Surplus, December 31
$66,846
$62,605
Net Expenses
Current Net Earnings
Net Additions (Deductions)3
Less:
Assessment by Board of Governors:
Board Expenditures
Federal Reserve Currency Costs
Dividends Paid
Payments to U.S. Treasury
Transferred to surplus
Surplus Account
Reimbursements due from the U.S. Treasury and other Federal agencies; SI,220 was
unreimbursed in 1988 and $1,549 in 1987.
3This item consists mainly of unrealized net gains (losses) related to revaluation of
assets denominated in foreign currencies to market rates.
19
Directors
December 31, 1988
Federal Reserve Bank of Minneapolis
Helena Branch
Michael W. Wright
Marcia S. Anderson
Chair and Federal Reserve Agent
Chair
John A. Rollwagen
Warren H. Ross
Deputy Chair
Deputy Chair
Class A Elected by Member Banks
Appointed by the Board of Governors
Charles W. Ekstrum
Marcia S. Anderson
President and Chief Executive Officer
First National Bank
Philip, South Dakota
President
Bridger Canyon Stallion Station, Inc.
Bozeman, Montana
Joel S. Harris
Warren H. Ross
President
Yellowstone Bank
Billings, Montana
President
Ross 8-7 Ranch
Chinook, Montana
Duane W. Ring
Appointed by the Board of Directors
Federal Reserve Bank of Minneapolis
President
Norwest Bank La Crosse, N.A.
La Crosse, Wisconsin
Class B
Elected by Member Banks
Bruce C. Adams
Partner
Triple Adams Farms
Minot, North Dakota
Richard L. Falconer
District Manager-Finance
US West Communications
Minneapolis, Minnesota
Earl R. St. John, Jr.
President
St. John Forest Products, Inc.
Spalding, Michigan
Class C Appointed by the Board of Governors
Delbert W. Johnson
President and Chief Executive Officer
Pioneer/Norelkote
Minneapolis, Minnesota
John A. Rollwagen
Chairman and Chief Executive Officer
Cray Research, Inc.
Minneapolis, Minnesota
Michael W. Wright
Chairman, Chief Executive Officer and President
Super Valu Stores, Inc.
Minneapolis, Minnesota
Federal Advisory Council Member
DeWalt H. Ankeny, Jr.
Chairman and Chief Executive Officer
First Bank System, Inc.
Minneapolis, Minnesota
20
F. Charles Mercord
President and Managing Officer
First Federal Savings Bank of Montana
Kalispell, Montana
Noble E. Vosburg
President and Chief Executive Officer
Pacific Hide and Fur Corporation
Great Falls, Montana
Robert H. Waller
President and Chief Executive Officer
First Interstate Bank of Billings, N.A.
Billings, Montana
Officers
December 31, 1988
Federal Reserve Bank of Minneapolis
Helena Branch
Gary H. Stern
Kathleen J. Balkman
Joseph R. Vogel
Robert F. McNeills
President
Assistant Vice President
Chief Examiner
Vice President and Manager
Thomas E. Gainor
John H. Boyd
Warren E. Weber
David P. Nickel
First Vice President
Research Officer
Research Officer
Assistant Vice President
Melvin L. Burstein
Robert C. Brandt
William G. Wurster
Senior Vice President
and General Counsel
Assistant Vice President
Assistant Vice President
Leonard W. Fernelius
Assistant Vice President
Senior Vice President
Ronald E. Kaatz
Senior Vice President
Arthur J. Rolnick
Senior Vice President
and Director of Research
James U. Brooks
Marilyn L. Brown
Assistant General Auditor
James T. Deusterhoff
Assistant Vice President
Richard K. Einan
Assistant Vice President
and Community Affairs Officer
Sheldon L. Azine
Vice President
and Deputy General Counsel
Jean C. Garrick
Assistant Vice President
James H. Hammill
Vice President
Assistant Vice President
and Secretary
Bruce J. Hedblom
Caiyl W. Hayward
Phil C. Gerber
Vice President
Assistant Vice President
Bruce H. Johnson
William B. Holm
Vice President
Richard L. Kuxhausen
Assistant Vice President
Ronald O. Hostad
Vice President
Assistant Vice President
David Levy
Thomas E. Kleinschmit
Vice President and
Director of Public Affairs
Assistant Vice President
James M. Lyon
Assistant Vice President
Keith D. Kreycik
Vice President
Roderick A. Long
Susan J. Manchester
Assistant Vice President
Vice President
Richard W. Puttin
Preston J. Miller
Assistant Vice President
Vice President and
Deputy Director of Research
Thomas M. Supel
Clarence W. Nelson
Vice President
and Economic Advisor
Charles L. Shromoff
General Auditor
Colleen K. Strand
Vice President
Theodore E. Umhoefer, Jr.
Vice President
Assistant Vice President
Claudia E. Swendseid
Assistant Vice President
Kenneth C. Theisen
Assistant Vice President
Thomas H. Turner
Assistant Vice President
Carolyn A. Verret
Assistant Vice President
21
Federal Reserve Bank of Minneapolis
250 Marquette Avenue
Minneapolis, Minnesota 55480
@FedFRASER