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A Sure Thing
People who visit the Federal Reserve Bank of
Boston often ask if the Fed and FDIC are one and
the same. In response to their questions, this
article describes how the FDIC helps to promote
and maintain a sound banking system. Future
Ledger articles will focus on the Federal Home
Loan Bank Board and its deposit-insurance arm,
FSLIC; as well as on the National Credit Union
Administration.
Several passages in this piece are taken directly
from two excellent sources: FDIC, Symbol of
Confidence, a clearly written 26-page pamphlet
published by FDIC; and American Banker, a
daily banking newspaper. Many thanks to both.

The Federal Deposit Insurance Corporation has protected bank deposits
since 1934. In all that time, no one has
lost money in an FDIC-insured
account.
Prior to the advent of Federal deposit
insurance, however, bank failures
claimed the savings of all too many depositors. Money in the bank was protected by little more than the bank
manager's expertise and good name .
Prudent souls often kept part of their
savings buried in the backyard or hidden in the mattress.
Between 1886 and 1933, there were
several unsuccessful attempts to introduce national deposit insurance. Despite tragic and widespread losses, the
public seemed willing to live with the
status quo .
Then came the Great Depression of
the 1930s. Hard times and financial
pressures triggered an unprecedented
number of bank failures. Panic swept
the country. Anxious depositors linedup outside their banks and waited for a
chance to convert their deposits to
cash. Many waited in vain . Thousands
of banks closed their doors forever, and
losses ran into the millions of dollars.

Bank run in the early 1900s

Courtesy, Library of Congress

The human suffering was incalculable.
Panic turned to despair, and a stunned
nation looked to Washington for help .
In response to the crisis, Congress
passed the Banking Act of 1933, a landmark piece of legislation that chartered
the Federal Deposit Insurance Corporation and established deposit insurance on a national basis. This action,
along with other changes in the law,
helped to restore public confidence in
the banking system. Bank failures declined from approximately 4,000 in
1933 to 61 in 1934.
When the FDIC opened for business
on January 1, 1934, Federal law provided deposit insurance coverage of up
to $2,500 per depositor. Since then, the
level of coverage has kept pace with the
changing times. Today some 15,000

commercial banks and mutual savings
banks display a sticker that reads,
"Each depositor insured to $100,000."
If an FDIC-insured bank fails, a depositor's savings, checking, and other deposit accounts are added together and
protected up to $100,000. Joint
accounts and individual accounts are
separately insured. Holders of Keogh
Plan Retirement Accounts and Individual Retirement Accounts receive
separate $100,000 coverage as well. A
depositor may obtain additional coverage by opening accounts at different
insured banks but not at different
branches of the same bank.
Depositors in FDIC-insured banks
automatically receive deposit insurance protection at no extra charge .
Each bank pays for the cost of insur-

Federal Reserve Bank of Boston Vol. 8, No. 3 - November 1982

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ance through annual assessments
based on its deposit volume. (Since
1961, the annual effective net assessment rate has ranged between 1/30 and
1/24 of one percent of average deposits .) These assessments are paid
into a deposit insurance fund and invested in U.S. Government securities.
Interest income from these investments is added to the insurance fund.
In December 1981, the fund balance
stood at approximately $12.2 billion.
Money from the deposit insurance
fund covers losses sustained only
through the closing of an FDIC-insured
bank. Over the years, FDIC supervisory operations have helped to keep
such closings to a minimum. From 1934
to 1981, fewer than 600 FDIC-insured
banks closed because of financial difficulties. (By comparison, bank failures
averaged 588 per year during the preFDIC 1920s.)
The general policy of FDIC is to examine each bank under its jurisdiction
at least once every 18 months . Banks
with known supervisory or financial
problems receive a full-scale examination at least once every 12 months . In
either case, examiners pay particular
attention to adequacy of a bank's capital, the quality of its assets, the availability of adequate funds, the use of
sound accounting procedures, and the
overall quality of a bank's management. Each examination report also
notes any unacceptable banking practices or violations of law and suggests
corrective steps.
Should a bank persist in following
unsound or illegal practices, the FDIC
may ini tiate proceedings to issue a
cease-and-desist order against the
bank or one or more of the bank's officers. In certain cases, the FDIC may
even initiate proceedings to terminate a
bank's insurance. However, termination of a bank's insurance is extremely
rare, and even if insurance is terminated, existing deposits continue to be insured by the FDIC for two years .
By keeping a close watch on each
insured bank, the FDIC seeks to avert
situations that might lead to bank closings. Banks, however, are subject to
many of the same uncertainties that
confront other business enterprises,
and sometimes they are forced to close.
Should a bank fail, the FDIC is ready to
respond as soon as a bank's chartering
authority closes the institution. (The
chartering authority is either the State,
or in the case of a national bank, the
Comptroller of the Currency.)
2


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PAYOUT - Penn Square Bank, N .A. Oklahoma City, Oklahoma
Friday, July 2, 1982
Reports were circulating in Oklahoma City Thursday that the
American Banker
Federal Deposit Insurance Corporation is dispatching examiners to
review the financial condition of Penn Square Bank, N.A.
Tuesday, July 6, 1982 The controversy surrounding Penn Square Bank, N.A. of Oklahoma City heated up Friday, as reports circulated about high-level
American Banker
regulatory meetings taking place to assess the need for possible
supervisory action . . .. Informed Washington banking sources
said a high-level meeting took place Friday in Washington involving representatives of the Office of Comptroller of the Currency and
the Federal Deposit Insurance Corporation.
Wednesday,
July 7, 1982
American Banker

In a move that has occurred only twice before in the 50-year history
of the Federal Deposit Insurance Corp., the deposit insurance
agency Monday formed the Deposit Insurance National Bank, this
time to assume the deposits of the failed $460 million-deposit Penn
Square Bank, N.A . ...
The new institution opened at 9:00 a. m. Tuesday to begin paying off
insured depositors and will remain open until that is accomplished.
Penn Square, which had about 80% of its own portfolio in energy
loans and which sold more than $2 billion in participations to
several large banks, was declared insolvent at 7:05 p.m. Monday,
by Comptroller of the Currency, C. T. Conover, who named the
FDIC receiver.
It thus became the largest payout in the history of FDIC and the
fourth largest commercial bank failure in history. It was the 16th
commercial bank failure this year . . ..
One elderly woman, asked if she had any concern about her money,
said, "I have confidence in what the gentleman said on TV this
morning." The gentleman was William~- Isaac, chairman of the
Federal Deposit Insurance Corporation, who called a 7:30 a.m.
news conference to reassure the public that their deposits up to
$100,000 would be safe ...
. . . however, the insurance agency said it would guarantee full
payment only up to the $100,000 insurance limit. Larger depositors
have been put on the same footing with the failed bank's creditors
and, in all likelihood, will receive less than 100% on the dollar.

In most cases, the FDIC tries to
arrange a '.'purchase and assumption"
transaction. A new or existing bank
takes over many of the failed bank's
assets and assumes its deposits. The
FDIC then takes over any assets the
acquiring bank may not want (bad
loans and investments, for example)
and tries to liquidate those assets .
Purchase and assumption transactions
often take place with no interruption of
banking services.

If a purchase and assumption cannot
be arranged, the FDIC immediately
pays each depositor up to the insurance limit. A payout begins within
days of a bank's closure. Deposits in
excess of the insurance limit are unpro-

tected, but holders of these deposits
are sometimes paid out of proceeds
realized from liquidation of the bank's
assets .
During 1982, two bank closings figured prominently in the news . One involved a direct payout. The other involved a purchase and assumption
transaction . Both cases illustrate how
the FDIC works to maintain the stability of the American banking system.

the LEDGER
Editor: Robert Jabaily
Graphics Arts Designer, Ernie Norville
Photography: Johannah Miller

I

PLACE
STAMP
HERE

ROBERT JABAILY T-3
FEDERAL RESERVE BANK OF BOSTON
600 ATLANTIC AVENUE
BOSTON , MA 02106


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aLEDGER

Economic Education Newsletter

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Multi-Media

Monday, July 12, 1982 The FDIC has customarily arranged for another bank to assume the
American Banker
deposit liabilities of a failed institution, in effect guaranteeing all
deposits - even those in excess of the fund's $100,000 insurance
limit.

GIVE & TAKE IN THE SCHOOLS
Some students will see a lot of Give
& Take in the classroom this fall,
thanks to another combined effort by
the Joint Council on Economic Education, the Canadian Foundation for Economic Education, and the Agency for
Instructional Television. The creators
of Trade-offs, the widely acclaimed
economic education video series for
fifth and sixth graders, recently completed extensive testing on Give &
Take, a new video series designed to
"improve the economic reasoning and
decision-making skills," of eighth,
ninth, and tenth graders.

The FDIC said several factors made this impossible in the Penn
Square situation: the extreme financial weakness of the bank; the
likelihood that the bank had substantial contingent liabilities that
will surface in the future; and the fact that, as a unit banking state,
Oklahoma does not have many banking companies that could absorb
a half-billion dollar company.
PURCHASE AND ASSUMPTION -

Abilene National BankAbilene, Texas
Thursday,
July 14, 1982
American Banker

Abilene National Bank - a $428 million deposit energy lender in
Abilene, Texas - nearly became a casualty of the fallout from the
failure of Penn Square Bank.
Depositor nervousness, coupled with rumors and local press coverage, caused a run on the bank that drained almost 10% of its
deposits since Friday . ...

The $1.7 million project applies economic principles to everyday problems. Twelve 15-minute programs concentrate on such areas as managing
personal resources and making career
choices. Each program presents students with an open-ended economic
problem or situation. "We're not
teaching answers," explains Dr. Phillip
Saunders, chief consultant for Give &
Take. "We do hope that as a result of
the series, students will be more equipped to debate these economic issues
intelligently in terms of analysis rather
than slogan."

The bank was hurt because of public comparisons of its energy loan
portfolio with that of the Oklahoma City bank.
Tuesday,
August 10, 1982
American Banker

The latest commercial bank to fail was the $450 million-asset
Abilene National Bank in Abilene, Texas. Its failure, the second
largest of a commercial bank this year, occurred less than six weeks
after the collapse of Penn Square Bank of Oklahoma City . . ..
. . . the Federal Reserve Board late Friday was approving the
acquisition of Abilene National Bank by the Mercantile Texas
Corp., a $6.8 billion-asset, Dallas based holding company.
The Federal Deposit Insurance Corp., at that time announced that it
would provide financial assistance to facilitate the acquisition . ...
The FDIC board acted to grant financial assistance for the acquisition by Mercantile following notification by the Comptroller of the
Currency that the bank was in imminent danger of failing.

The series' design allows teachers
and students considerable flexibility.
They need not use every program, nor
view the programs in sequence. Each
program has independent instructional objectives.

The federal insurer decided to help keep the bank open rather than
close it and pay off the depositors, because the former option was less
costly.
The assistance to Mercantile consists of a five-year, $50 million
deposit. The bank does not have to pay interest on the deposit for the
first two years; during the final three years, interest must be paid
semiannually at the prevailing rate on one-year Treasury bills.

◄

MEMBERS OF A ROCK GROUP decide on the best way to save money for new outfits in "Let's
Save/Opportunity Costs," Give & Take, Program 3.

Courtesy, Joint Council on Economic Education

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Program Three, for example, focuses
on members of a rock band who must
determine the best way to save money
for new outfits. The program is called
"Let's Save," and its goal is to help
students apply the concepts of opportunity costs and trade-offs to the areas
of spending and saving. The objectives
for "Let's Save" stipulate that students
will, among other things: 1) "define
opportunity costs as the loss of the next
most desirable alternative when limited resources are used for one purpose instead of another," and 2) "describe how saving involves foregoing
spending in hopes of having larger
amounts of money to spend tomorrow." Students are also asked to give
examples of various forms of saving
and explain how all savings decisions
involve trade-offs among risk, liquidity, and return.
The people who developed Give &
Take also recognize that the series' sue3

Continu ed from page 3

cess hinges on how teachers use the
program in the classroom. As part of an
overall effort to promote effective use
of Give & Take, the Economic Education Council of Massachusetts will offer
regular in-service workshops at no
charge. Teachers may choose between
a basic, half-day session and a more
extensive 15-20 hour workshop .
The half-day session uses a four-part
instructional videotape from the Agency for Instructional Television to introduce teachers to "the rationale, objectives, and content, of Give & Take."
The session also explores ways to integrate Give & Take programs into other
parts of an existing curriculum.

In Massachusetts, the longer workshops will be conducted by the Center
Directors at the Centers for Economic
Education.

University of Maine at Orono
30 Coburn Hall
Orono, ME 04469
(207) 581-7069

For more information on either the
15-20 hour workshop or the half-day
session, please contact:

• New Hampshire Council on Economic Education
State of New Hampshire Dept. of
Education
64 N . Main Street
Concord, NH 03301
(603) 271 -3609

Mr. Daniel Gibbs
Executive Director
Economic Education Council of
Massachusetts
19 Fort Hill Street
Hingham, MA 02043
(617) 749-8466
Outside Massachusetts, please contact
your state Economic Education
Council:

The more comprehensive 15-20 hour
workshop consists of twelve modules,
one for each program in the Give &
Take series. Module B, for example,
allows workshop participants an
opportunity to view "Let's Save"
(Program 3) and then review key concepts related to saving and investing.

• Connecticut Joint Council on
Economic Education
U-55 University of Connecticut
Storrs, CT 06268
(203) 486-3565
• Maine Council on Economic
Education

New England Update
CONNECTICUT

The Center for Economic Education/
Central Connecticut State College will
begin a "Distinguished Speakers
Series" on October 18 at the Center's
33rd annual meeting. The series will
focus on Socio-Economic Issues of Our
Times. Frank E. Morris, President of the
Federal Reserve Bank of Boston, is the
inaugural speaker. His topic is "Economic Issues - Election '82." The series
will also feature :
February 7, 1983 Lester C. Thurow
Author, Zero Sum
Society
"Economic Survival
in the '80s"
April 4, 1983

on Monday, November 8, 1982 at the
4-H Center in Ashland . The program
will feature Ed Berger, stock market
consultant and well-known radioffV
financial reporter. Mr. Berger, a trustee
of the Council, will share his views on
the communication of economic concepts in the 1980s.
In addition, Program Committee
chairperson Dick Barrows, will discuss
plans for teacher training in the use of
Give & Take, the new economic education video series. Trustee Bob Littlefield of the Bancroft School in Andover
will describe the Children's Economy
curriculum he developed for 5th and

• Rhode Island Council on Economic Education
Rhode Island College
Dept. of Economics & Management
Providence, RI 02908
(401) 456-8037
• Vermont Council on Economic
Education
Vermont Economic Education
Project
Vermont State Dept. of Education
Montpelier, VT 05602
(802) 828-3111

6th graders. Loren Robbins, art education coordinator in the Carlisle Public
Schools will also be on the program.
Dinner will cost $8.00 per person.
For more information, please contact
the Economic Education Council of
Massachusetts, 19 Fort Hill Street,
Hingham, MA 02043, (617) 749-8466.
Bob Reinke recently became director
of the National Center of Economic
Education for Children at Lesley College in Cambridge, MA.
We are updating our mailing list. If
you would like to continue receiving
The Ledger, please complete and return the enclosed response card .

Lindley H. Clark
Economic News
Editor, Wall Street
Journal
"Recording America's Priorities"

For more information please contact
the Center for Economic Education,
Marcus White Hall, Room 117, Central
Connecticut State College, New Britain, CT 06050.
MASSACHUSETTS

The Economic Education Council of
Massachusetts will hold its fall meeting
4


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