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Remarks to French financial journalists
November 8,1995

I would like to discuss briefly with you who we are at the FD1C and what we do.
Congress established the nation’s capital here in Washington in 1790. At that time, only
six cities in the United States had a population of more than 8,000 people. In 1790, the
population of Paris was about 600,000. Given the youth of our country, it is not surprising
that we in the United States are new at much of what we do here.
That is especially so in the field of money and banking, upon which all other economic
activity rests. In the early nineteenth century, two experiments in maintaining the presence
of the national government in the U.S. banking system ended in disaster. We finally
succeeded in establishing a lasting national banking authority in 1863. Before the federal
government entered the banking system that year to create a uniform currency and a
reliable system of money, there were in circulation some 10,000 currencies issued by 1,600
private banks.
Europe, of course, is working on some of these same issues today. We, too, were a
confederation before we became a federation, and for us, it was not a linear path from one
to the other. Some analysts have said that only the necessities of financing armies in the
field during our Civil W ar could overcome opposition to the presence of the national
government in banking. Indeed, our central bank -- the Federal Reserve —was not
founded until 1913. We came to our senses late.
In one regard, however, we have led in banking, not followed. The FDIC today manages
the oldest national deposit insurance fund in the world.
Our birth was painful. Nine thousand banks failed in the four years before the FDIC was
created in 1933 - almost half in the first few months of that year. Those 9,000 failures
resulted in losses to depositors of about $1.3 billion. The failure of one bank would set off a
chain reaction, bringing about other failures. Sound banks frequently failed when large
numbers of depositors panicked and demanded to withdraw their deposits —leading to a
“run” on a bank.
The U.S. banking system lay dormant. The U.S. economy was suffering the worst economic
depression in modern history. With the U.S. financial system on the verge of collapse, both

the manufacturing and agricultural sectors were operating at a fraction of capacity.
Between 1886 and 1933, at least 150 proposals for national deposit insurance or a national
guaranty of deposits were made in Congress. Many of these proposals came in response to
financial crises, although none were as severe as that of the early 1930s.
Despite conditions at that time, President Franklin D. Roosevelt and the American Bankers
Association voiced opposition to a government guarantee of bank deposits.
They believed that such a guarantee would subsidize poorly managed banks at the expense
of well managed banks. The bankers association, in fact, led the opposition, holding
deposit insurance to be, and I quote, “unsound, unscientific, unjust and dangerous.”
Public opinion, however, demanded action, and action was taken. A government insurance
fund was set up to back deposits. The year after the FDIC was created, nine insured banks
One economist summed up the birth of the FDIC in this way: it was the obscure and
unwanted Federal Deposit Insurance Corporation that brought the anarchy of unmanaged
bank failures in the United States to an end.
Over three generations, deposit insurance has brought peace of mind to tens of millions of
depositors, who no longer had reason to fear the failure of their banks.
More important, by insulating banks from runs and panics, deposit insurance stabilized the
U.S. financial system and helped facilitate the Federal Reserve’s effort to manage the
money supply.
Because of our success, we have become a model to other nations interested in establishing
deposit insurance operations and particularly so in recent years, a reflection both of the
turn to free markets around the world and of the heightened awareness that free financial
markets are by definition built on assuming risk.
Deposit insurance was so successful in stabilizing the U.S. financial markets that stability —
in the sense of maintaining equilibrium —began to be taken for granted. A small but vocal
group of critics began to question the need for deposit insurance at all. They asked: in a
global financial marketplace linked by instant communication, have we not gotten beyond
the idea of guaranteeing household savings?
No one, however, repealed the business cycle. The failures of nearly 1,400 U.S. banks from
1982 through 1992 reminded us that stabilizing can also mean keeping a deteriorating
situation from worsening. Those failures reminded us that guaranteeing savings is not only
an end in itself but a means of stabilizing the banking system in times of stress. Those
failures reminded us that stability is always a goal, not a given.


I would not argue, however, that there are not legitimate questions that can be raised about
deposit insurance. One area to which we have given a great deal of attention —and to
which we will give more —is the element of moral hazard presented by our deposit
insurance system. In banking, deposit insurance gives bank managers —whose job it is to
maximize shareholder value —the incentive to increase risk, both by investing in riskier
projects than would otherwise be undertaken and by increasing leverage.
Deposit insurance shifts these risks onto the deposit insurer, and in our case, potentially
onto the American taxpayer. In other words, it creates a situation where if a bet —a loan —
comes up heads, the insured institution wins, and if it comes up tails, the insurer loses. In
the last few years, we have instituted risk-related deposit insurance premiums, higher
minimum capital standards, and other reforms to address the problem of moral hazard. It
is difficult, however, to eliminate moral hazard altogether from any deposit insurance
In the end, the U.S. government’s guarantee of the deposit insurance fund stabilizes our
banking system. A similar guarantee would probably be prohibitively expensive for a
private, non-governmental insurer. At the FDIC, we are working to monitor, assess and
address risks to the banking system more effectively, in an effort to avoid falling back on
this guarantee —and the demand on American taxpayers it represents -- as was necessary
during our savings and loan crisis.
In the final analysis, I believe the benefits in terms of stability that flow from our deposit
insurance system have outweighed its potential costs and effects.
Let me give you an idea of the magnitude of our work. As you know, we insure deposits of
up to $100,000 at banks and savings and loan associations. Last year insured banks in the
United States held approximately $2.5 trillion in deposits. We insured $1.9 trillion of those
deposits —about 77 percent of the total. The savings and loans that we insured held $720
billion in deposits. The Savings Association Insurance Fund coverage represented $693
billion of those deposits —about 96 percent. In addition, in 1994 we examined more than
4,300 institutions for safety and soundness, and we still have about $13 billion in assets to
liquidate from banks that failed, mostly from the banking crisis in the late 1980s and early
1990s. O ur Bank Insurance Fund has a balance of just over $25 billion and our Savings
Association Insurance Fund has a balance of just above $3 billion.
Finally, one of our goals for the future is to identify, monitor and address risk in the
financial system more efficiently and proactively, and to that end we are retooling and
repositioning the agency to enhance its ability to assess risks to the deposit insurance funds.
I would be happly to address any of your questions.

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