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¿ /Isn tJ u 'ì'-iJ NEWS RELEASE fEDERAL DEPOSIT INSURANCE CORPORATION FOR RELEASE UPON DELIVERY PR-76-76 (9-13-76) ) / fitto*** T H E F D IC : D E P O S IT IN SU R A N C E A d d r e s s by R o b e r t E . B a r n e tt , C h a ir m a n F e d e r a l D e p o s it I n s u r a n c e C o r p o r a tio n b e f o r e th e 82nd A n n u a l C o n v e n tio n , K e n tu c k y B a n k e r s A s s o c ia tio n , G a lt H o u se © L o u is v ille , K e n tu c k y hy. S e p te m b e r 13, 1976; V A Digitized forFEDERAL FRASER DEPO SIT IN S U R A N C E CO RP O R A TIO N , 550 Seventeenth St. N.W., Washington, D.C. 20429 202-389-4221 T h e r e a r e tim e s w h e n i t s e e m s m o s t p r o p itio u s to e n c o u r a g e p u b lic e x a m in a tio n a n d d i s c u s s i o n of i s s u e s th a t a f f e c t o u r b a n k in g s y s t e m f o r th e p u r p o s e of s e e in g w h e th e r an d how th in g s m ig h t b e im p r o v e d . to b e o n e of th o s e t i m e s . T h is w o u ld a p p e a r M an y b a n k s th a t h a d e n c o u n te r e d d if f ic u ltie s in th e p a s t y e a r o r so s e e m to b e g r a d u a lly w o rk in g o u t of th e m . T h in g s a r e lik e ly to b e b e t t e r f o r m o s t b a n k s d u rin g th e b a la n c e of th is y e a r an d n e x t. B o th b a n k r e g u l a t o r s an d C o n g r e s s a r e l e s s p r e o c c u p ie d w ith e m e r g e n c y s itu a tio n s an d th u s , h o p e fu lly , b e t t e r a b le to v ie w i s s u e s in p e r s p e c t i v e . In lig h t of a l l of t h i s , I w o u ld lik e to d i s c u s s th e a d e q u a c y an d f a i r n e s s of d e p o s it i n s u r a n c e a s it e x i s t s to d a y , a n d m a k e a fe w p r e l i m i n a r y r e m a r k s a b o u t 100 p e r c e n t d e p o s it i n s u r a n c e a s o n e a l t e r n a t i v e to th e c u r r e n t s y s te m . E x c e p t f o r o c c a s io n a l i n c r e a s e s in th e l i m i t s of d e p o s it in s u r a n c e c o v e r a g e , t h e r e h a s n o t b e e n an y f u n d a m e n ta l c h a n g e in o u r s y s te m of f e d e r a l d e p o s it in s u r a n c e s in c e th e b e g in n in g of th e F D IC . W h ile I a m f a r f r o m d i s s a t i s f i e d w ith o u r p r e s e n t d e p o s it i n s u r a n c e s y s te m , t h e r e a r e s e v e r a l r e a s o n s f o r r a is in g th e i s s u e of c h a n g e of th e s y s te m a t t h is ti m e - - i f th e m e r e p a s s a g e of s o m e f o r ty - o d d y e a r s i s n o t s u f f ic ie n t in i t s e l f . F i r s t , th e H u n t C o m m is s io n m a d e s u g g e s tio n s f o r c h a n g e th a t r e l a t e to d e p o s it i n s u r a n c e , b u t n o n e of th e C o m m is s io n ’s r e c o m m e n d a tio n s in th a t a r e a fo u n d t h e i r w a y in to th e l e g i s l a t i o n th e C o n g r e s s h a s r e c e n tly c o n s id e r e d . N e ith e r h a v e o th e r p o s s ib le c h a n g e s , a m o n g w h ic h w a s 100 p e r c e n t d e p o s it i n s u r a n c e , w h ic h th e C o m m is s io n c o n s id e r e d b u t r e j e c t e d . T h ese is s u e s have th e r e b y e s c a p e d th e p u b lic a tte n tio n a n d d i s c u s s i o n w h ic h th e l e g i s l a t i v e p r o c e s s a lw a y s p r o v id e s . - 2 - F u r t h e r , d e p o s it i n s u r a n c e i s o b v io u s ly lin k e d to b a n k f a i l u r e s , an d s o m e r e c e n t f a i l u r e s a r e d if f e r e n t e n o u g h f r o m e a r l i e r o n e s to r e q u i r e r e c o n s i d e r a t i o n of o u r u n s p o k e n p r e m i s e s . F o r m o s t of th e lif e of th e F D IC b a n k f a i l u r e s h a v e in v o lv e d r e l a t i v e l y s m a l l b a n k s . F r o m th e b e g in n in g of th e C o r p o r a tio n in 1934 th r o u g h 1 9 7 0 , o n ly o n e i n s u r e d b a n k w h ic h f a ile d h a d o v e r $50 m illio n in d e p o s it s , an d a lm o s t a l l of th e m w e r e u n d e r $5 m illio n in d e p o s it s . T h e n u m b e r of d e p o s i t o r s an d d o l l a r a m o u n t of d e p o s its in an y f a i l u r e , t h e r e f o r e , w e r e q u ite s m a l l. In j u s t th e l a s t s ix y e a r s , h o w e v e r, w e h a v e s e e n f a i l u r e s of s o m e v e r y l a r g e b a n k s , in c lu d in g tw o o v e r $1 b illio n in d e p o s it s , tw o of $100 m illi o n to $500 m illi o n an d fiv e b e tw e e n $50 a n d $100 m illio n . E v e n th o u g h b a n k s g e n e r a lly h a v e g ro w n d r a m a t i c a l l y in s i z e , * th e n u m b e r of d e p o s i t o r s a f f e c te d b y r e c e n t f a i l u r e s h a s g ro w n r e l a t i v e l y a s w e ll a s a b s o lu te ly . F in a lly , th e a p p r o p r i a t e r o le of th e F D IC a n d o th e r b a n k a g e n c ie s in b a n k s u p e r v is io n h a s b e e n r a i s e d in a n u m b e r o f w a y s r e c e n tly , a n d I b e lie v e i t i s a p p r o p r i a t e to r e v ie w th e v a r y in g fu n c tio n s o f th e C o r p o r a tio n , in c lu d in g i t s r o le a s a n i n s u r e r , in s o m e d e p th . T o d a y I p la n to d i s c u s s th e a d e q u a c y ’a n d f a i r n e s s o f th e c u r r e n t d e p o s it in s u r a n c e s y s te m , in p a r t b y d e s c r ib in g how th e F D IC d e a ls w ith b a n k f a ilu r e s an d th e b a s i s f o r o u r d e c is io n s . I w ill th e n b r i e f l y c o n s i d e r th e r a tio n a le fo r th e o n e a l t e r n a t i v e n o r m a lly s u g g e s te d - - 100 p e r c e n t d e p o s it in s u r a n c e . In In 1 9 5 6 , a $500 m illi o n d e p o s it b a n k w o u ld h a v e b e e n th e 4 2 n d l a r g e s t bank in th e U. S. , an d a b illio n d o l l a r b a n k w o u ld h a v e b e e n th e 1 8 th l a r g e s t . A s of J u n e 3 0 , 1976, a $500 m illio n b a n k w o u ld b e o n ly th e 1 8 6 th l a r g e s t , an d a b illio n d o l l a r b a n k o n ly th e 8 9 th l a r g e s t . ¥ - 3 - o th e r s c h e d u le d s p e e c h e s o v e r th e n e x t s e v e r a l w e e k s , I in te n d to e x p lo r e m o r e th o ro u g h ly th e a r g u m e n ts an d im p lic a tio n s n o t o n ly of 100 p e r c e n t d e p o s it in s u r a n c e , b u t a ls o of o th e r a l t e r n a t i v e s to th e p r e s e n t s y s te m . It i s n o t th e p r e s e n t in te n tio n of th e F D IC to p r o p o s e s u c h le g is la ti o n , n o r do I w is h to le a v e th e i m p r e s s i o n th a t th e C o r p o r a tio n w o u ld f a v o r s u c h l e g is la ti o n if i t w e r e p r o p o s e d a t th e p r e s e n t t i m e . B u t w e do p la n to re v ie w a ll th e i s s u e s s u r r o u n d in g th e m a t t e r a s w e ll a s o th e r s b a s ic to th e F D IC . T h e b a s ic p u r p o s e of d e p o s it in s u r a n c e i s to p r o t e c t th e b a n k in g s y s te m a g a in s t d e s t r u c t i v e r u n s on d e p o s its a s w e ll a s to p r o t e c t th e d e p o s it o r s th e m s e l v e s . W ith r e s p e c t to th e l a t t e r , m o s t d e p o s i t o r s h a v e f a r e d e x tr e m e ly w e ll in th e 519 in s u r e d b a n k s w h ic h w e r e c lo s e d s in c e th e e s ta b lis h m e n t of th e F e d e r a l D e p o s it I n s u r a n c e C o r p o r a tio n , A b o u t 9 9 .8 p e r c e n t of a l l d e p o s i t o r s , l a r g e o r s m a l l, fu lly r e c o v e r e d t h e i r d e p o s its a lm o s t im m e d ia te ly , w ith o n ly o n e - te n th of o n e p e r c e n t h a v in g to w a it f o r th e liq u id a tio n of b a n k a s s e t s . A nd l e s s th a n 5, 000 o u t of n e a r l y 3 m illi o n d e p o s it o r s a r e e x p e c te d to e x p e r ie n c e an y d e p o s it l o s s a t a l l . O ut of $4 b illio n in d e p o s its a t f a ile d b a n k s th r o u g h 1975, a p p r o x im a te ly $267 m illi o n w a s lo s t o r i s e x p e c te d to b e lo s t . Of th is a m o u n t, u n p r o te c te d d e p o s it o r s s to o d to lo s e a b o u t $13 m illio n , th e C o r p o r a tio n a b s o r b in g th e r e m a i n d e r . T h e s e l o s s f i g u r e s do n o t ta k e a c c o u n t of f o r e g o n e i n t e r e s t in s itu a tio n s w h e r e r e c o v e r i e s h a v e r e q u i r e d e x te n d e d p e r io d s of t i m e . If w e ta k e th is in to a c c o u n t, e v e n u s in g m o d e s t i n t e r e s t r a t e le v e l s f o r th i s p u r p o s e , l o s s e s on a n o p p o r tu n i ty - c o s t b a s i s w o u ld b e a p p r o x im a te ly 50 p e r c e n t g r e a t e r th a n th e f ig u r e s I h a v e c ite d . In v ie w of th e n u m b e r of y e a r s in v o lv e d an d th e v o lu m e of d e p o s it s , m o s t w o u ld a g r e e th a t l o s s e s of th is m a g n itu d e a r e n o t s u b s ta n tia l. T h e h ig h r e c o v e r y r a t e f o r d e p o s it o r s i s a t t r i b u t a b l e a t l e a s t in p a r t to th e f a c t th a t $9 o u t of e v e r y $10 in d e p o s its w e r e in b a n k f a i l u r e s w h ic h w e r e h a n d le d b y p u r c h a s e a n d a s s u m p tio n t r a n s a c t i o n s in w h ic h th e F D IC p r o v id e d a s s i s t a n c e e n a b lin g a n o th e r b a n k to a s s u m e th e f a ile d b a n k 's l i a b i l i t i e s . T h is a r r a n g e m e n t p r o v id e s , in e f f e c t, 100 p e r c e n t i n s u r a n c e to u n in s u r e d d e p o s i t o r s an d g e n e r a l c r e d i t o r s a s w e ll a s to F D IC i n s u r e d d e p o s ito rs . If o n e o r m o r e of th e l a r g e b a n k f a i l u r e s (U n ite d S ta te s N a tio n a l B an k o r F r a n k l i n N a tio n a l B an k , f o r e x a m p le ) h a d b e e n p a id o ff, th e n u m b e r of d e p o s i t o r s n o t h a v in g d e f a c to 100 p e r c e n t i n s u r a n c e w o u ld h a v e b e e n s u b s ta n t ia ll y l a r g e r . H o w e v e r, e v e n in b a n k s w h ic h w e r e h a n d le d b y a p a y o ff of i n s u r e d d e p o s it s , m o r e th a n 99 p e r c e n t of th e d e p o s i t o r s a r e a s s u r e d of p a y m e n t in f u ll a n d m o r e th a n 98 p e r c e n t of a ll d e p o s its (in d o l l a r s ) a r e e x p e c te d to be re c o v e re d . I n s u r a n c e c o v e r e d a b o u t 70 p e r c e n t of th e s e d e p o s it s , an d a n o th e r 16 p e r c e n t w e r e p r o te c te d v ia p le d g e d a s s e t s , p r e f e r e n c e , o r lo a n o f f s e ts ; a s in a p u r c h a s e a n d a s s u m p tio n , t h e s e d e p o s its w e r e m a d e a v a i l a b le to d e p o s i t o r s a lm o s t im m e d ia te ly . B u t th e c o n s e q u e n c e s of a p a y o ff to in d iv id u a l d e p o s it o r s w ho h e ld th e r e m a in in g 14 p e r c e n t of th e e x c e s s d e p o s its w e r e n o t q u ite so f a v o r a b le . A lth o u g h o n e - t h i r d of t h e s e d e p o s it o r s h a v e h i s t o r i c a l l y r e c o v e r e d t h e i r d e p o s its in f u ll, in a ty p ic a l p a y o u t, th e d e p o s i t o r s w ho a r e n o t fu lly in s u r e d h a v e l o s t a b o u t 12 p e r c e n t of t h e i r in d iv id u a l d e p o s it s . In a d d itio n , t h e s e d e p o s i t o r s , in c lu d in g th o s e w ho a r e lu c k y e n o u g h to r e c o v e r in fu ll, m u s t f o r e g o i n t e r e s t on th e r e c o v e r a b l e p o r tio n of t h e i r d e p o s its w h ile w a itin g - 5 - f o r th e b a n k 's a s s e t s to b e liq u id a te d . In m a n y i n s t a n c e s , th e fo r e g o n e i n t e r e s t h a s b e e n c o n s id e r a b le a n d , a s I h a v e s u g g e s te d , m a y e q u a l o n e - h a lf of th e l o s s e s of p r i n c i p a l i n c u r r e d . T h e d e p o s i t o r s c a u g h t in t h i s s itu a tio n c o m p r i s e a m ix e d g ro u p , an d a g ro u p th a t to a g r e a t e x te n t in c lu d e s d e p o s it o r s th a t w o u ld h a v e to b e a m o n g th e m o r e s o p h is ti c a te d a n d k n o w le d g e a b le a b o u t th e c o n d itio n of a b a n k . S a v in g s a n d lo a n a s s o c i a t i o n s a c c o u n te d f o r c lo s e to o n e - t h i r d of th e to t a l of th e s e d e p o s it s . T h e n e x t l a r g e s t a m o u n t w a s h e ld b y in d iv id u a ls , fo llo w e d by n o n fin a n c ia l c o r p o r a t i o n s , c r e d i t u n io n s , p u b lic e n titie s an d b a n k s , in th a t o rd e r. In a d e p o s it p a y o ff, b a la n c e s in s e c u r e d a n d p r e f e r r e d d e p o s it s , a s w e ll a s i n s u r e d d e p o s it s , a r e p a id o v e r to t h e i r o w n e r s , u s u a lly b e g in n in g fiv e to s e v e n d a y s fo llo w in g th e c lo s in g of th e b a n k , f o r w h ic h th e C o r p o r a tio n r e c e iv e s th e s u b r o g a te d c la i m s of t h e s e o w n e rs a g a in s t th e b a n k 's a s s e t s . O w n e rs of u n in s u r e d d e p o s its h a v in g a n y in d e b te d n e s s to th e b a n k a l s o m a y r e q u e s t to h a v e t h e i r lo a n s o f f s e t a g a in s t t h e i r d e p o s it b a la n c e s . B o th th e C o r p o r a tio n and u n in s u r e d h o ld e r s of e x c e s s d e p o s its n o t p r o t e c t e d b y th e fo r e g o in g f e a t u r e s m u s t a w a it r e c o v e r y on t h e i r c la im s f r o m a n o fte n le n g th y liq u id a tio n of th e b a n k 's a s s e t s an d m u s t b e a r a p r o r a t a s h a r e of a n y l o s s th a t e n s u e s . In a p u r c h a s e an d a s s u m p tio n , th e a c q u ir in g b a n k a s s u m e s a l l th e d e p o s it l i a b i l i t i e s of th e f a ile d b a n k e n s u r in g l i t t l e o r no d is r u p tio n in b a n k in g s e r v i c e s to th e c o m m u n ity a n d p ro v id in g f u ll p r o te c tio n to b o th i n s u r e d an d u n in s u r e d d e p o s it o r s a lik e . T o th e e x te n t th a t th e i n i t i a l t r a n s i t i o n a ls o in v o lv e s i l i t t l e c h a n g e in p e r s o n n e l a n d f a c i l i t i e s , th e t r a n s a c t i o n i s a ls o lik e ly to m in im iz e a n y s e c o n d a r y r e a c t i o n s a ffe c tin g th e p u b lic 's c o n fid e n c e in th e b a n k in g s y s t e m . W h e re r e l a t i v e l y l a r g e b a n k s a r e in v o lv e d o r w h e r e th e f a i l u r e c o in c id e s w ith u n c e r ta in t y in f in a n c ia l m a r k e t s , t h is c o n fid e n c e f a c t o r i s o n e t h a t s h o u ld n o t b e m in im iz e d . If th e a c q u ir in g b a n k a c q u i r e s o r p u r c h a s e s a s u b s ta n tia l a m o u n t of a s s e t s , t h i s n o t o n ly f a c i l i t a t e s th e d is p o s itio n of th e a s s e t s f o r F D IC b u t a ls o i s c o n s i s t e n t w ith m a in ta in in g th e e s ta b lis h e d b a n k in g r e la tio n s h ip b e tw e e n lo a n s an d d e p o s its w h ic h i s n e c e s s a r i l y s e v e r e d in a p a y o ff. In r e c o g n itio n of th e v a lu e of a c q u ir in g a go in g b u s i n e s s , th e a s s u m in g b a n k s w ill u s u a ll y p a y a p r e m iu m f o r th e a s s e t s an d d e p o s its of th e f a ile d b a n k , th u s r e d u c in g th e n e t l o s s r e s u l t i n g f r o m th e b a n k f a i l u r e . In e ffe c t th e F D IC i s a b le to r e c o v e r , f o r th e b e n e f it of c r e d i t o r s a n d s h a r e h o l d e r s , a " g o in g b u s i n e s s " v a lu e o r g o o d w ill f r o m th e f a ile d b a n k . In c o n t r a s t , th e n e c e s s a r y t r a n s f e r of d e p o s its to o t h e r b a n k s b y in d iv id u a l d e p o s it o r s fo llo w in g a p a y o ff c o m m a n d s no s u c h s p e c ia l p r i c e f r o m th e r e c i p i e n t b a n k s . D e s p ite t h e s e a d v a n ta g e s , i t h a s n o t a lw a y s b e e n p o s s ib le f o r th e FD IC to a r r a n g e a p u r c h a s e a n d a s s u m p tio n . S in c e J a n u a r y 1, 1 9 7 1 , f o r e x a m p le , p u r c h a s e a n d a s s u m p tio n s c o u ld n o t b e a r r a n g e d in 15 of th e 40 b a n k s th a t c lo s e d . In u n it b a n k in g s t a t e s , i t m a y b e im p o s s i b le to fin d a n e a r b y b a n k th a t is i n t e r e s t e d o r in a p o s itio n to a c q u ir e th e f a ile d b a n k . S in c e th e o ffic e of th e f a ile d b a n k m u s t b e c lo s e d , th e p o te n tia l p u r c h a s in g b a n k c a n n o t b e s u r e of r e ta in in g th e b u lk of th e f a ile d b a n k 's b u s i n e s s . S im ila r ly , in u n it b a n k in g s t a t e s o r s t a t e s in w h ic h b r a n c h in g s t a t u t e s a r e r e s t r i c t i v e , o th e r w is e s u ita b le b a n k s lo c a te d e ls e w h e r e in th e s ta t e c a n n o t e v e n b e c o n s id e r e d . - 7 - E v e n in u n it b a n k o r r e s t r i c t e d b ra n c h in g s t a t e s w h e r e m u ltib a n k h o ld in g c o m p a n ie s a r e p e r m i t t e d , th e c o s t o r c o m p le x itie s of e s ta b lis h in g a n o th e r b a n k (a s o p p o s e d to a b r a n c h ) m a y b e e n o u g h g r e a t e r a s to m a k e th e a c q u i s i tio n of th e d e fu n c t b a n k u n p r o f ita b le . Of th e 13 p a y o ffs s in c e J a n u a r y 1, 1971, a ll of th e m h a v e b e e n in s t a t e s w h ic h a t th e t i m e of f a i l u r e h a d e i t h e r u n it b a n k in g o r l im it e d b r a n c h in g la w s . E v e n in fu ll b r a n c h in g s t a t e s , h o w e v e r, i t m a y b e th a t th e m a r k e t s e r v e d by th e d e fu n c t b a n k s im p ly h a s in s u f f ic ie n t v a lu e to a t t r a c t th e i n t e r e s t of a n y b a n k l a r g e e n o u g h to m a n a g e th e a s s e t s a n d l i a b i l i t i e s . In o r d e r to m a k e th e p u r c h a s e an d a s s u m p tio n t r a n s a c t i o n a t t r a c t i v e to p o te n tia l ta k e o v e r b a n k s , th e F D IC in d e m n if ie s th a t b a n k a g a in s t u n k n o w n l i a b i l i t i e s th a t m a y s u r f a c e a f t e r th e ta k e o v e r . T h a t in d e m n ity is o n e g iv e n b y th e C o r p o r a tio n in i t s r o l e a s a C o r p o r a tio n , n o t in i t s r o le a s a r e c e i v e r , an d t h e r e f o r e i s n o t lim it e d b y th e e s t a t e of th e f a ile d b a n k , b u t r a t h e r is s u p p o r te d by th e d e p o s it in s u r a n c e fu n d . In c a s e s of f r a u d , th e c o n s e q u e n c e s m a y b e so s e v e r e a s to c o n v in c e th e C o r p o r a tio n th a t g r a n tin g s u c h an in d e m n ity to th e a c q u ir in g b a n k m a y in v o lv e to o m u c h r i s k to th e i n s u r a n c e fu n d . M o re s p e c if ic a lly , s in c e th e C o r p o r a tio n i s p e r m i t t e d u n d e r S e c tio n 1 3 (e) of th e s ta tu te to a s s i s t in a p u r c h a s e a n d a s s u m p tio n t r a n s a c t i o n o n ly if d o in g so w ill r e d u c e th e r i s k o r a v e r t a t h r e a t e n e d l o s s " to th e C o r p o r a tio n ( in t e r p r e t e d o v e r tim e by th e C o r p o r a tio n to m e a n "o n ly if i t s c h e a p e r " ) if th e a s s e t s an d c o n tin g e n t l i a b i l i t i e s of th e c lo s e d b a n k a r e to o ill - d e f i n e d f o r th e C o r p o r a tio n to m a k e a r e a s o n a b le e s t i m a t e of th e c o m p a r a ti v e c o s ts of a n a s s u m p tio n v e r s u s a p a y o ff, i t m a y n o t do s o . D e s p ite o u r c a r e , u n d e r s u c h u n c e r ta in - 8 - c o n d itio n s th e C o r p o r a tio n p r o b a b ly h a s e r r e d on b o th s id e s , o p tin g f o r a p a y o u t in s o m e in s t a n c e s of f r a u d o r e m b e z z le m e n t w h e n s u b s e q u e n t d e v e lo p m e n ts s u g g e s te d th a t a p u r c h a s e a n d a s s u m p tio n t r a n s a c t i o n w o u ld h a v e b e e n l e s s c o s tl y a n d , in a fe w i n s t a n c e s , o p tin g f o r a p u r c h a s e an d a s s u m p tio n w h ic h l a t e r p ro v e d to in v o lv e c o n s id e r a b ly m o r e l i a b i l i t i e s o r w o r th le s s a s s e t s th a n e x p e c te d . In s e v e r a l r e c e n t b a n k f a i l u r e s F D IC h a s c o n c lu d e d th a t i t w a s n e c e s s a r y to e x c lu d e f r o m a s s u m p tio n c o n tin g e n t an d s u s p e c te d c la i m s in o r d e r to d e t e r m in e t h a t th e p u r c h a s e a n d a s s u m p tio n w a s c h e a p e r . p o w e r to do t h a t. We b e lie v e w e h a v e th e B u t th a t d e te r m in a tio n i s b e in g c h a lle n g e d in c o u r t. If th e c la i m a n ts p r e v a i l , u n d e r o u r p r e s e n t s ta tu e i t m a y b e d if f ic u lt to a r r a n g e a p u r c h a s e a n d a s s u m p tio n w h e r e w e a r e u n a b le to d e fin e th e l i a b i l i t i e s of th e b a n k on th e d a te i t c l o s e s . E v e n in b a n k f a i l u r e s n o t b e s e t b y e m b e z z le m e n t o r w ro n g d o in g , h o w e v e r , t h e r e a r e s t i l l m a n y u n c e r t a i n t i e s c o n c e r n in g th e f in a n c ia l s ta t u s of th e c lo s e d b a n k a n d th e p o s s ib le o u tc o m e fo llo w in g c l o s u r e . S in c e 1 9 5 1 , th e C o r p o r a tio n h a s a tte m p te d to m a k e in f o r m e d c o s t e s t i m a t e s in a c c o r d a n c e w ith s ta t u to r y r e q u i r e m e n t s to c h o o s e th e m o s t ’e c o n o m ic a l a l t e r n a t i v e . U n d e r th e m e th o d u s e d , w e f i r s t e s t i m a t e th e in s u r e d a n d u n in s u r e d s h a r e s of th e exp ected lo s s . T h e C o r p o r a tio n a s s u m e s th e f u ll l o s s in a n a s s u m p tio n a n d o n ly th e i n s u r e d s h a r e of th e l o s s in a p a y o u t. T h u s , th e d if f e r e n c e in t h e s e tw o fig u re s — r e p r e s e n t e d b y th e u n in s u r e d s h a r e of th e l o s s — d e t e r m i n e s th e a d d itio n a l c o s t to th e C o r p o r a tio n of a n a s s u m p tio n . F r o m th e r e s u l t i n g f ig u r e , w e a ls o g u s u a ll y s u b t r a c t th e a d m i n i s t r a t i v e c o s ts of d i s tr ib u tin g d e p o s it b a la n c e s to - 9 - i n s u r e d d e p o s i t o r s - - c o s t s , w h ic h a r e i n c u r r e d in a p a y o u t b u t n o t in a n a s s u m p tio n . T h e r e m a in in g d if f e r e n c e m u s t b e m a d e up in s o m e m a n n e r in o r d e r f o r th e C o r p o r a tio n to j u s tif y a p u r c h a s e a n d a s s u m p tio n on a c o s t b a s is . T y p ic a lly , th i s i s d o n e b y a p r e m iu m p a id b y th e a c q u ir in g b a n k w h ic h a s s u m e s th e l i a b i l i t i e s a n d c e r t a i n of th e a s s e t s of th e f a ile d b a n k . The p r e m iu m o f f e r e d i s u s u a lly d e te r m in e d th r o u g h c lo s e d b id s s u b m itte d b y p o te n tia l b u y e r s - - u s u a ll y , b u t n o t a lw a y s , e x is tin g b a n k s o r b a n k h o ld in g c o m p a n ie s . In p r a c t i c e , th e a s s u m in g b a n k u s u a ll y d o e s n o t ta k e o v e r a l l of th e a s s e t s of th e f a ile d b a n k . M any of th o s e a r e of s u c h p o o r q u a lity th a t w e do n o t w a n t to w e a k e n th e ta k e o v e r b a n k b y r e q u ir in g i t to ta k e th e m . T hese a r e ta k e n o v e r b y th e F D IC w h ic h th e n p r o v id e s c a s h to m a k e u p th e d if f e r e n c e b e tw e e n a s s e t s p u r c h a s e d a n d l i a b i l i t i e s a s s u m e d ( l e s s , of c o u r s e , th e p r e m iu m p a id ). F o r e x a m p le , a s s u m e a b a n k f a i l s w ith d e p o s its a n d n o n s u b o r d in a te d l i a b i l i t i e s of $100 m illi o n a n d of th is to t a l $75 m illi o n (75 p e r c e n t) i s i n s u r e d d e p o s it s . A n tic ip a te d l o s s e s a r e p r o je c te d a t $20 m illio n . In a p a y o ff, u n in s u r e d d e p o s i t o r s a n d o th e r c r e d i t o r s w o u ld a b s o r b 25 p e r c e n t of th e l o s s , o r $5 m illi o n . In a p u r c h a s e an d a s s u m p tio n , a s s u m in g th e F D IC b u y s b a c k a ll q u e s tio n a b le a s s e t s , a l l l o s s e s w o u ld b e a b s o r b e d by th e F D IC . T h u s , an a c q u ir in g b a n k w o u ld h a v e to b id a t l e a s t a $5 m illi o n p r e m iu m ( le s s th e s a v in g to th e F D IC of a v o id in g th e c o s t of p a y in g i n s u r e d d e p o s i t o r s in a p ay o ff) to j u s tif y th e t r a n s a c t i o n on a c o s t b a s i s . - 10 - S in c e O c to b e r of 1974, fo llo w in g a n a n n o u n c e m e n t to th a t e ffe c t by th e n C h a ir m a n W ille , th e F D IC h a s m a d e a s p e c ia l e f f o r t in a l l f a i l u r e s to a r r a n g e a p u r c h a s e an d a s s u m p tio n t r a n s a c t i o n , in c lu d in g d e v e lo p in g an d u s in g th e c o n c e p t of a n " a ll c a s h " o r " c le a n b a n k " t r a n s a c t i o n , one in w h ic h th e C o r p o r a tio n d e l i v e r s to th e ta k e o v e r b a n k c a s h e q u a l to th e l i a b i l i t i e s a s s u m e d l e s s th e p r e m iu m . S in c e th a t tim e , o n ly 4 of th e 24 b a n k s w h ic h h a v e f a ile d h a v e b e e n h a n d le d b y a p a y o ff r a t h e r th a n a p u r c h a s e a n d a s s u m p tio n t r a n s a c t i o n . T h e s e f o u r b a n k s w e r e e a c h u n d e r $20 m illio n in d e p o s its w h e n th e y f a ile d . A s I h a v e s u g g e s te d , i t is th e p r e f e r r e d m e th o d f o r r e a s o n s o th e r th a n c o s t, an d o n e m ig h t e x p e c t th a t th is m ig h t le a d u s to fu d g e o u r c o s t e s t i m a t e s in f a v o r of a p u r c h a s e an d a s s u m p tio n . b e e n th e c a s e . H o w e v e r, th a t d o e s n o t s e e m to h a v e In f a c t, a r e c e n t re v ie w of o u r m e th o d of c a lc u la tin g c o m p a r a t i v e c o s ts r e v e a le d th a t s o m e a d d itio n a l c o n s id e r a tio n s sh o u ld p r o p e r ly b e ta k e n in to a c c o u n t w h ic h w o u ld s ig n if ic a n tly im p r o v e th e r e l a t i v e c o s t s ta tu s of a s s u m p tio n s so th a t in e v e n m o r e c a s e s th a n now th e y w o u ld b e l e s s c o s tly to F D IC th a n p a y o ffs , e v e n if th e p r e m iu m b id s w e r e to f a l l s h o r t of th e u n in s u r e d d e p o s i t o r s ' s h a r e of th e lo s s a s c u r r e n t l y c a lc u la te d . D e p e n d in g on h o w lo n g a b a n k is k n o w n o r s u s p e c te d to b e in tr o u b l e b e f o r e b e in g c lo s e d , t h e r e i s a s tr o n g lik e lih o o d th a t a s ig n if ic a n t n u m b e r of u n in s u r e d d e p o s i t o r s , e s p e c ia ll y th o s e h o ld in g s iz a b le d e m a n d d e p o s it s , w ill h a v e w ith d ra w n th e e x p o s e d p o r tio n of t h e i r d e p o s it s , le a v in g b a la n c e s th a t to a c o n s id e r a b le e x te n t a r e p r o te c te d f r o m an y l o s s b y p r e f e r r e d s t a t u s , p le d g e d a s s e t s o r o f f s e ta b le lo a n s . T h e l a t t e r h a d n o t f ig u r e d in o u r c a l c u la tio n s u n til e x a m in a tio n of th e F r a n k li n N a tio n a l B an k f a i l u r e sh o w e d how - 11 s ig n if ic a n t a f a c t o r o f f s e ts c o u ld b e , p a r t i c u l a r l y in a la r g e - b a n k f a i l u r e . We e s t i m a t e th a t a b o u t t h r e e - f o u r t h s of th e u n in s u r e d d e m a n d d e p o s its and o n e - t h i r d of a ll u n in s u r e d d o m e s tic d e p o s its r e m a in in g a t F r a n k li n a t th e tim e it c lo s e d w e r e p r o te c te d b y lo a n o f f s e ts . On th is b a s i s , th e p r e m iu m r e q u ir e d to ju s tif y a r r a n g in g a p u r c h a s e an d a s s u m p tio n r a t h e r th a n p a y in g off i n s u r e d d e p o s i t o r s w a s n e a r l y o n e - t h i r d s m a l l e r th a n th e a m o u n t e s ti m a te d by ig n o rin g o f f s e ts . W h e re t h e r e is s u f f ic ie n t tim e an d th e s ta k e s a r e r e l a t i v e l y h ig h , w e h a v e t r i e d to s t r u c t u r e th e t r a n s a c t i o n so th a t th e a c q u ir in g b a n k ta k e s a c o n s id e r a b le p o r tio n of th e a s s e t s of th e f a ile d b a n k . T h is b o th p u ts in d iv id u a l b o r r o w e r s in m u c h b e t t e r p o s itio n th a n th e y w o u ld b e if t h e i r lo a n s w e r e le f t in th e r e c e i v e r 's h a n d s , an d d is r u p t s th e c o m m u n ity l e s s . In a d d itio n , i t m in im i z e s th e F D I C 's c a s h o u tla y an d f o r e g o n e i n t e r e s t , an d te n d s to r e d u c e o u r l o s s e s on c o lle c tio n s a s w e ll a s liq u id a tio n e x p e n s e s . O u r l i q u id a to r s a r e s k ille d p r o f e s s i o n a l s w ho do a n e x c e lle n t jo b of c o lle c tin g on th e a s s e t s of c lo s e d b a n k s . N e v e r t h e l e s s , in m a n y in s ta n c e s a n a c q u ir in g b a n k h a s a d v a n ta g e s in lo a n c o lle c tio n c o m p a r e d w ith th e F D IC a c tin g a s r e c e i v e r . W h e re lo a n s a r e c u r r e n t an d a s s o c i a t e d w ith a d e p o s it r e la tio n s h ip , th e y a r e w o r th m o r e to th e b a n k th a n to th e F D IC . A bank m ay b e v e r y h a p p y to c a r r y o r e v e n e x te n d a lo a n a r r a n g e m e n t w h e r e s iz a b le d e p o s it b a la n c e s a r e in v o lv e d . W h e re w o rk o u ts in v o lv in g a d d itio n a l a d v a n c e s a r e n e c e s s a r y , th e b a n k a s an o n g o in g f in a n c ia l in s titu tio n ty p ic a lly h a s m o r e f le x ib ility th a n th e FD IC a c tin g a s a r e c e i v e r . F r e q u e n tly , th o u g h n o t a lw a y s , th e a c q u ir in g b a n k h a s s ta f f , e x p e r ie n c e , an d e x p e r t i s e in th e lo c a l m a r k e t 12 - an d b e c a u s e of th is m a y b e a b le to m o v e m o r e k n o w le d g e a b ly in th e e a r l y p h a s e s of th e c o lle c tio n p r o c e s s . In p r a c t i c a l l y a ll c a s e s , b u ild in g s , l e a s e s , an d o th e r p h y s ic a l f a c i l i t i e s a r e w o rth m o r e on a g o in g - c o n c e r n b a s i s to th e a c q u ir in g b a n k th a n th e y w o u ld h a v e if th e y w e r e liq u id a te d in a p a y o ff. If a c o lle c tio n m a t t e r u ltim a te ly en d s up in c o u r t, th e FD IC s o m e tim e s a p p e a r s a s an o u ts id e r w ith u n lim ite d r e s o u r c e s a tte m p tin g to ta k e a ll th e a s s e t s of a n u n f o r tu n a te lo c a l m e r c h a n t o r b u s in e s s m a n . In m a n y of th e s m a l l e r p u r c h a s e an d a s s u m p tio n t r a n s a c t i o n s , w e h a v e n o t r e q u ir e d b id d in g b a n k s to ta k e lo a n s of th e f a ile d b a n k . E v e n in th e s e t r a n s a c t i o n s , h o w e v e r , a c q u ir in g b a n k s f r e q u e n tly b u y s o m e lo a n s , th e r e b y f a c ilita tin g th e liq u id a tio n p r o c e s s . W ith in th e FD IC w e h a v e b e e n lo o k in g a t th e p u r c h a s e an d a s s u m p tio n p r o c e s s to s e e how s u c h t r a n s a c t i o n s m ig h t b e m o d if ie d an d im p r o v e d . It m a y b e f e a s i b l e to s t r u c t u r e t r a n s a c t i o n s so th a t a c q u ir in g b a n k s u s u a lly ta k e a h ig h p e r c e n ta g e of a s s e t s . B y m in im iz in g FD IC c a s h o u tla y s , f o r e g o n e i n t e r e s t , an d liq u id a tio n e x p e n s e s , th e o v e r a ll c o s t to th e F D IC m ig h t b e f u r t h e r re d u c e d . In 1951 a C o n g r e s s io n a l c o m m itte e w a s s e v e r e l y c r i t i c a l of W hat appeared to b e an a u to m a tic FD IC d e c is io n to u s e th e p u r c h a s e an d a s s u m p tio n a lte r n a tiv e in a l l b a n k f a i l u r e s . In f a c t, t h e r e h a d b e e n no p a y o ffs b e tw e e n 1944 an d 1951, an d c o m p a r a ti v e c o s t t e s t s h a d b e e n v ir t u a lly ig n o r e d . c o u ld b e p r e d ic te d : T h e r e s u l t , o f c o u rs e , O ne b a n k w ith to ta l a s s e t s of o n ly $637 th o u s a n d r e q u ir e d an o u tla y by th e FD IC of $ 1 .8 m illio n an d an u ltim a te lo s s of $1 m illi o n , to e ffe c t F D I C - a s s i s t e d p u r c h a s e a n d a s s u m p tio n w ith a c c o m p a n y in g in d e m n itie s ^ to th e t a k e o v e r b a n k . F o llo w in g th a t c r i t i c i s m , th e FD IC b e c a m e a n d h a s 13 r e m a in e d v e r y c a r e f u l to a r r a n g e p u r c h a s e an d a s s u m p tio n t r a n s a c t i o n s o n ly w h e n th e c o s ts ju s tif y t h a t d e c is io n , a n d , a s I h a v e m e n tio n e d , t h e r e h a v e b e e n a fe w i n s t a n c e s in w h ic h p a y o ffs h a v e o c c u r r e d . N e v e r t h e l e s s , a ll of th e c o n s id e r a tio n s I h a v e m e n tio n e d s u g g e s t th a t w e a r e lik e ly to c o n tin u e to h a n d le m o s t b a n k f a i l u r e s th r o u g h p u r c h a s e an d a s s u m p tio n t r a n s a c t i o n s a s w e h a v e d u r in g th e p a s t fe w y e a r s . W h ile s u b o r d in a te d c r e d i t o r s a n d e q u ity i n v e s t o r s ty p ic a lly lo s e m o s t o r a l l of t h e i r in v e s tm e n t in p u r c h a s e a n d a s s u m p tio n t r a n s a c t i o n s , d e p o s it o r s an d n o n s u b o r d in a te d c r e d i t o r s in c u r no l o s s e s . A s a r e s u l t w e h a v e h a d de f a c to 100 p e r c e n t i n s u r a n c e f o r a ll d e p o s it o r s in m o s t b a n k s in r e c e n t y e a r s . W hat w e h a v e n o t h a d i s e q u ity , f a i r n e s s , an d lo g ic in d e te r m in in g w h ic h a r e to b e th e fe w d e p o s it o r s w ho do n o t h a v e 100 p e r c e n t i n s u r a n c e . T h o s e in s t a n c e s w h e r e d e p o s it o r s h a v e e x p e r ie n c e d l o s s e s in p a y o ffs h a v e r e f le c te d s p e c ia l c i r c u m s t a n c e s f r o m th e F D IC 's s ta n d p o in t - t n o t f r o m th e d e p o s i t o r s '. F o r e x a m p le , t h e r e w e r e s o m e c a s e s w h e r e i t w as n o t p o s s ib le to a r r a n g e f o r a p u r c h a s e an d a s s u m p tio n b e c a u s e of th e lo c a tio n of th e b a n k , b e c a u s e of th e s t a t e 's b r a n c h an d h o ld in g c o m p a n y la w s , b e c a u s e th e FD IC c o u ld n o t g e t a good fix on l i a b i l i t i e s b e c a u s e of p e n d in g la w s u its o r s u s p e c te d f r a u d , e tc . U n c e r ta in ty a n d p o te n tia l c o s t c o n s id e r a tio n s m a y h a v e a f f o r d e d lo g ic a l r e a s o n s f o r a p a y o ff in s u c h c a s e s a s f a r a s th e FD IC "was c o n c e r n e d . H o w e v e r, u n in s u r e d d e p o s it o r s w e r e n o t n e c e s s a r i l y a t f a u lt. u n lu c k y . T hey w e re I r e c o g n iz e th a t th e s e w e r e l a r g e d e p o s it o r s w ho p r e s u m a b ly w e r e s o p h is tic a te d an d k n o w le d g e a b le e n o u g h to s c r u t i n i z e th e c o n d itio n of th e b a n k - 14 - b e f o r e m a k in g t h e i r d e p o s it s . h e lp e d in a ll c a s e s . T h e f a c t i s , h o w e v e r, th a t w o u ld n o t h a v e T h e s o p h is ti c a te d d e p o s it o r i s m o r e lik e ly to b e a b le to d e te c t p o o r m a n a g e m e n t, w h ic h w ill p ro b a b ly le a d to a p u r c h a s e an d a s s u m p tio n t r a n s a c t i o n in w h ic h h e w ill b e 100 p e r c e n t in s u r e d if h e le a v e s h is d e p o s it w ith th e b a n k , th a n to d e te c t f r a u d , w h ic h is m o r e lik e ly to le a d to a p a y o u t an d s o m e l o s s on h i s d e p o s it s . In a fe w o t h e r in s t a n c e s w h e r e th e c o n tin u e d e x is te n c e of th e f a ilin g b a n k w a s e s s e n t i a l to th e c o m m u n ity s e r v e d , th e FD IC h a s p ro v id e d d i r e c t a s s i s t a n c e u n d e r S e c tio n 13(c) of i t s s ta t u te , th e r e b y e lim in a tin g o r p o s tp o n in g th e n e e d f o r c lo s in g th e b a n k a n d l o s s e s to d e p o s i t o r s . T h is s e c tio n h a s b e e n u s e d r a r e l y b y th e F D IC , a t l e a s t p a r tly b e c a u s e i t r e q u i r e s a fin d in g t h a t p r e s e r v a t i o n o f th e b a n k in q u e s tio n i s e s s e n t i a l f o r p ro v id in g a d e q u a te b a n k in g s e r v i c e s to th e c o m m u n ity . W h ile I do n o t q u a r r e l w ith th e a p p r o p r i a t e n e s s o f th is t e s t , i t h a s n o th in g to do w ith an y e q u ita b le d e t e r m i n a tio n f r o m th e d e p o s i t o r 's s ta n d p o in t of w h ic h d e p o s it o r s g e t c o v e r e d in fu ll a n d w h ic h do n o t. A n o th e r f a c t o r a ffe c tin g d e p o s it o r l o s s e s h a s b e e n th e tim in g of b a n k c lo s i n g s . D e c is io n s on b a n k c lo s in g s a r e m a d e b y a g e n c ie s th a t c h a r t e r th e b a n k s : th e C o m p t r o l l e r of th e C u r r e n c y a n d th e s t a t e b a n k s u p e r v i s o r s . The F e d e r a l R e s e r v e m a y p la y a n im p o r ta n t r o le in c o n n e c tio n w ith a d v a n c e s to m e m b e r b a n k s a n d th e F D IC p r o v id e s in p u t to th e C o m p t r o l l e r a n d th e s t a t e s . D e la y s in c lo s in g a b a n k , a v o id a b le o r u n a v o id a b le , p a r t i c u l a r l y a f t e r a d v e r s e p u b lic ity , e n a b le s o m e l a r g e d e p o s i t o r s to w ith d ra w fu n d s to a v e r t a p o s s ib le lo s s . In s o m e in s t a n c e s s u c h d e la y s h a v e b e n e f itte d s p e c if ic d e p o s i t o r s , - 15 - p e r h a p s j u s t th o s e d e p o s it o r s w h ic h w e h a v e a r g u e d o v e r th e y e a r s p r o v id e th e d is c i p lin e to to p m a n a g e m e n t. It m a y a ls o b e , h o w e v e r , th a t th o s e d e p o s it o r s w ho le a v e d u r in g th e d e la y s j u s t h a p p e n to b e th o s e w h o s e d e p o s it c e r t i f i c a t e s m a t u r e d u rin g th e p e r io d , a r e l a t i v e l y illo g ic a l b a s i s f o r p r e f e r r i n g one u n in s u r e d d e p o s it o r o v e r a n o th e r . S u ch w ith d r a w a ls , w h a te v e r th e b a s i s , i n c r e a s e th e s h a r e of l o s s b o r n e b y o th e r u n in s u r e d d e p o s i t o r s if th e b a n k is p a id off. If w e a lm o s t h a v e 100 p e r c e n t d e p o s it i n s u r a n c e a n d th e p r e s e n t s y s te m a p p e a r s to w o rk in a n a lm o s t ra n d o m w ay in i t s t r e a t m e n t of d e p o s it o r s - s i m i l a r d e p o s i t o r s a r e t r e a t e d d if f e r e n tly in d if f e r e n t c a s e s - - w hy n o t go to 100 p e r c e n t d e p o s it in s u r a n c e ? p lic a te d th a n th a t. O b v io u s ly , th is p r o p o s itio n is m o r e c o m T h e p o s s ib il ity th a t p r e s e n t l y u n in s u r e d d e p o s i t o r s w ill lo s e m o n e y in th e e v e n t of a b a n k f a i l u r e , f o r e x a m p le , d o e s m a k e a d if f e r e n c e in th e b e h a v io r of s o m e d e p o s it o r s a n d , a s a r e s u l t , in th e b e h a v io r of s o m e bank m a n a g e rs . T h is d if f e r e n c e i s i m p o r ta n t an d i ts im p a c t, I b e lie v e , h a s s o m e good an d b a d c o n s e q u e n c e s . I do n o t h a v e th e t i m e to d a y to t r a c e th o s e e ffe c ts in d e ta i l - - th a t i s in f a c t a n o th e r s p e e c h w h ic h I p la n to m a k e so o n - b u t I w o u ld lik e to b r i e f l y r e v ie w th e a r g u m e n ts f o r an d a g a in s t 100 p e r c e n t d e p o s it i n s u r a n c e , w ith o u t, a t l e a s t f o r th e tim e b e in g , c o m m ittin g to th e s u p p o r t of a n y of th e m . F i r s t , th e o b v io u s a r g u m e n ts in s u p p o r t: 1. O n e -h u n d re d p e r c e n t d e p o s it i n s u r a n c e o b v io u s ly w ill p r o v id e a d d i tio n a l p r o te c tio n to th o s e d e p o s it o r s w h o s e d e p o s its a r e n o t now fu lly p r o te c te d . B a s e d on p a s t e x p e r ie n c e , th e c o s t of th is a d d itio n a l i n s u r a n c e c o v e r a g e to th e - 16 - F D IC w o u ld b e s m a l l. We h a v e c a lc u la te d th a t th e a d d itio n a l c o s t to th e FD IC of p a y o ffs m a d e th ro u g h o u t th e C o r p o r a t i o n 's h i s t o r y , if n o n e of th e lo s s h a d b e e n b o r n e b y u n in s u r e d d e p o s it o r s an d th e s a m e b a n k s h a d f a ile d , w o u ld b e a b o u t $13 m illio n . Of c o u r s e , th a t is a s m a l l f i g u r e in p a r t b e c a u s e l a r g e i b a n k f a i l u r e s h a v e b e e n h a n d le d th r o u g h a p u r c h a s e an d a s s u m p tio n . For e x a m p le , if USNB h a d b e e n h a n d le d a s a p a y o ff r a t h e r th a n a p u r c h a s e an d a s s u m p tio n , th is f ig u r e w o u ld b e $88 m illi o n . A n im p o r ta n t p o in t, a s w e h a v e n o te d , is t h a t in e f f e c t, w e a l r e a d y h a v e a lm o s t 100 p e r c e n t d e p o s it in s u r a n c e b e c a u s e of o u r p o lic y o f a r r a n g in g p u r c h a s e a n d a s s u m p tio n t r a n s a c t i o n s w h e r e v e r p o s s ib le . 2. W ith 100 p e r c e n t d e p o s it i n s u r a n c e , d e p o s it o r s w o u ld h a v e no n e e d to w ith d ra w fu n d s f r o m b a n k s w ith p r o b le m s , a n d r u n s on s u c h b a n k s w o u ld n o t b e lik e ly to c a u s e a f a i l u r e . U n d e r o u r p r e s e n t s y s te m , w h e n a b a n k g e ts in to d if f ic u lty o r i s e x p o s e d to a d v e r s e p u b lic ity , s o m e u n in s u r e d d e p o s it o r s te n d to f le e , e x a c e r b a tin g th a t d iff ic u lty . O n e -h u n d re d p e r c e n t d e p o s it in su ra n c e w o u ld l i m i t d e p o s it o u tflo w s in a d v e r s e c i r c u m s t a n c e s , th u s p ro v id in g m o r e time to w o rk o u t a s o lu tio n f o r th e p r o b le m b a n k o r f o r m a n a g e m e n t to t u r n th e bank a ro u n d . If t h e s e c o n s id e r a tio n s p r e v a il o v e r o th e r c o n t r a d i c t o r y c o n s id e ra tio n s , w e w o u ld e x p e c t to h a v e f e w e r b a n k f a i l u r e s u n d e r a s y s t e m of 100 p e r c e n t d e p o s it i n s u r a n c e . 3. O n e -h u n d re d p e r c e n t d e p o s it in s u r a n c e w o u ld h a v e a b e n e f ic ia l im p a c t on c o m p e titio n a m o n g b a n k s . A t p r e s e n t , i n s titu tio n s d e e m e d to b e m o r e s o lid o r m o r e c o n s e r v a tiv e h a v e an a d v a n ta g e in c o m p e tin g f o r d e p o s its . ^ P e r h a p s th is i s a s i t sh o u ld b e . H o w e v e r, d e p o s it o r s m a y n o t b e a b le to - 17 - d i f f e r e n t i a t e a c c u r a t e l y a m o n g b a n k s a c c o r d in g to r i s k , an d f o r s o m e d e p o s i t o r s , s iz e b e c o m e s a p ro x y f o r s o u n d n e s s . O r d e p o s it o r s m a y s im p ly a s s u m e th a t w e w ill n o t a llo w a l a r g e b a n k f a i l u r e to r e s u l t in a p a y o ff. * O n e -h u n d re d p e r c e n t d e p o s it i n s u r a n c e w o u ld p ro b a b ly im p r o v e th e c o m p e titiv e p o s itio n s of s m a l l v s . l a r g e b a n k s an d of n e w v s . e s ta b lis h e d in s t i t u t i o n s . O v e r ti m e th is w o u ld o r d i n a r i l y b e e x p e c te d to r e d u c e th e le v e l of c o n c e n tr a tio n in b a n k in g , an d to le a d to m o r e c o m p e titiv e p r ic in g of b a n k in g s e r v i c e s . 4. B e c a u s e , a s I h a v e m e n tio n e d , w e w o u ld n o t n e e d to f e a r p ro v o k in g r u n s o n tr o u b l e d b a n k s , f u l l e r p u b lic d i s c l o s u r e of a d v e r s e in f o r m a tio n on a b a n k 's f in a n c ia l c o n d itio n c o u ld b e m a d e . T h is w o u ld le a d to m o r e in f o r m e d b u s in e s s d e c is io n s b y i n v e s t o r s a n d c u s t o m e r s of th e b a n k . 5. T h e r e h a s b e e n m u c h d i s c u s s i o n in th e p a s t a b o u t th e d is t o r t i o n s c a u s e d b y s t a t e p le d g in g r e q u i r e m e n t s f o r d e p o s its of p u b lic fu n d s . W ith 100 p e r c e n t d e p o s it i n s u r a n c e , s u c h r e q u i r e m e n t s c o u ld b e e lim in a te d w ith o u t an y r i s k of l o s s to th e d e p o s i t o r s . T h e o b v io u s a r g u m e n ts a g a in s t 100 p e r c e n t d e p o s it in s u r a n c e : 1. T h e p r in c ip a l a n d t r a d i t i o n a l a r g u m e n t a g a in s t 100 p e r c e n t d e p o s it in s u r a n c e is th a t u n in s u r e d d e p o s it o r s p la c e l i m i t s on th e r i s k i n e s s of b a n k H S t a tis tic a lly , t h e r e i s s o m e s u p p o r t f o r th a t p o s itio n , a s e v id e n c e d b y th e fo llo w in g : D u rin g th e p e r io d 1971 to S e p te m b e r 1, 1976, of th e b a n k s th a t c lo s e d , 29 w e r e l e s s th a n $25 m illio n in d e p o s it s . T w e lv e of th e s e w e r e p a id o u t, 15 w e r e a c q u ir e d by a t h i r d p a r t y in a n F D I C - a s s i s t e d p u r c h a s e and a s s u m p tio n t r a n s a c t i o n , an d 2 b e c a m e D e p o s it I n s u r a n c e N a tio n a l B a n k s . S e v e n of th e f a ile d b a n k s w e r e b e tw e e n $25 m illio n a n d $100 m illio n , a n d of t h e s e o n ly 1 w a s p a id o u t. F o u r w e r e o v e r $100 m illi o n a n d n o n e of th o s e w e r e p a id o u t. L o g ic a lly , le g a lly a n d h i s t o r i c a l l y , h o w e v e r , th e f a c t r e m a in s th a t no o n e c a n b e c e r t a i n th a t th e F D IC w ill a lw a y s b e a b le to a v o id p a y in g off e v e n a l a r g e b a n k . - 18 - o p e r a tio n s . W h ile t h e r e i s s o m e d e b a te a b o u t how e f f e c tiv e s u c h in flu e n c e is , few w o u ld d e n y th a t to a d e g r e e a t l e a s t , i t e x i s t s . W ith 100 p e r c e n t in s u r a n c e , b a n k s a n x io u s to i n c r e a s e t h e i r r i s k b y b id d in g a g g r e s s i v e l y f o r d e p o s its an d lo a n s m ig h t b e a b le to do so w ith o u t an y m a r k e t r e s t r a i n t s . No b a n k e r w a n ts to lo s e m o n e y o r f a i l , b u t s o m e w o u ld b e w illin g to ta k e on c o n s id e r a b le r i s k if th e y c o n s id e r p o te n tia l r e w a r d s in th e f o r m of g ro w th an d e a r n in g s to b e s u f f ic ie n t. T h is w e ig h in g of r i s k a n d r e w a r d w o rk s in m o s t s e c t o r s of o u r e c o n o m y , b u t w e n o r m a lly e x p e c t m o s t of th e r i s k to b e a s s u m e d b y e q u ity in v e s to rs . W h e re le v e r a g e i s so u g h t le n d e r s r e s t r a i n th e e x te n t of o v e r a ll r i s k b y im p o s in g r e s t r i c t i o n s - - h ig h e r i n t e r e s t r a t e s - - a n d lim itin g a v a i l a b le fu n d s a s r i s k i s i n c r e a s e d . In th e b a n k in g s y s te m , d e p o s it o r s p ro v id e m o s t of th e fu n d s , a n d if 100 p e r c e n t d e p o s it i n s u r a n c e w e r e to e x is t , m u c h o r m o s t of th e r i s k w o u ld b e b o r n e b y th e d e p o s it i n s u r a n c e fu n d . L e t m e e m p h a s iz e th a t th e a r g u m e n t is n o t th a t m o s t o r e v e n m a n y bankers w o u ld b e h a v e i r r e s p o n s i b l y if w e h a d 100 p e r c e n t d e p o s it i n s u r a n c e . R a th e r , i t i s th a t 100 p e r c e n t d e p o s it in s u r a n c e w o u ld e lim in a te m a r k e t r e s t r a i n t s th a t m a n y b e lie v e p r e s e n t l y e x is t w h ic h lim it th e a m o u n t of d e p o s its a v a ila b le to th e o v e r ly r i s k y , o v e r ly a g g r e s s i v e , o v e r ly o p tim is tic o r s e l f - s e r v i n g operation, 2. T o p r o t e c t i t s p o s itio n , th e FD IC m ig h t n e e d a u th o r ity to r e s t r i c t le v e r a g e o r th e c o m p o s itio n o f b a n k a s s e t p o r tf o lio s if 100 p e r c e n t d e p o s it i n s u r a n c e w e r e to e x is t . T r a d it io n a ll y , th e F D IC h a s o p p o s e d th e r e g u la tio n of th e o p e r a tio n a l m ix a n d I th in k m o s t b a n k e r s h a v e o p p o s e d i t , f e a r in g th a t r e g u la to r y r e s t r i c t i o n s m ig h t b e m o r e c o s tl y th a n th e b e n e f its of 100 p e r c e n t d e p o s it i n s u r a n c e . - 19 - 3. A s lo n g a s t h e r e a r e no r u n s o r liq u id ity p r e s s u r e s on b a n k s in d if f ic u lty , s u p e r v i s o r s m ig h t b e r e lu c ta n t to c lo s e b a n k s th a t a r e in s o lv e n t o r o p e r a tin g in a n e x c e s s iv e ly r is k y f a s h io n . 4. In v ie w of th e g r e a t e r r i s k s w h ic h b a n k s m ig h t ta k e a n d th e lo n g e r t i m e b e f o r e th e y a r e c lo s e d , th e u ltim a te l o s s e s to th e i n s u r a n c e fu n d m ig h t be la rg e . In f a c t, o u r p a s t e x p e r ie n c e of v e r y lim it e d l o s s e s m a y n o t b e a t r u e in d ic a tio n of th e p o te n tia l r i s k s u n d e r 100 p e r c e n t d e p o s it i n s u r a n c e . T h e r e a r e , of c o u r s e , o th e r i s s u e s in v o lv e d th a t I h a v e n o t e v e n m e n tio n e d . T h e s e in c lu d e th e p r e m iu m s t r u c t u r e f o r d e p o s it i n s u r a n c e . T h e s u g g e s tio n h a s o fte n b e e n m a d e th a t d e p o s it i n s u r a n c e p r e m iu m s b e tie d to th e r i s k i n e s s of th e b a n k , a s u g g e s tio n th a t is e a s i e r to ju s tif y in p r in c ip le th a n to w o rk o u t in p r a c t i c e . O th e r s a r g u e th a t t h e r e is a n in e q u ity in th a t b a n k s p a y p r e m iu m s on a l l d e p o s its e v e n th o u g h p a r t a r e n o t i n s u r e d . W hat sh o u ld w e do a b o u t in s u r a n c e c o v e r a g e f o r d e p o s its of A m e r ic a n b a n k s a b r o a d ? O r a b o u t th e d e p o s its of U. S. b r a n c h e s of f o r e ig n b a n k s ? If d e p o s its a r e i n s u r e d 100 p e r c e n t , w h a t a r e th e im p lic a tio n s f o r c a p it a l n e e d s in a b a n k ? W ould th e n e w m ix of r i s k s a f f e c t m o n e ta r y p o lic y m e c h a n is m s ? I cannot r e s o lv e a l l t h e s e i s s u e s to d a y , b u t I b e lie v e th a t th e b a n k in g s y s te m w o u ld b e n e f it f r o m p u b lic d is c u s s i o n of th e i s s u e s I h a v e r a i s e d to d a y a n d , a s I in d ic a te d a t th e o u ts e t, th is is p r o b a b ly a goo d ti m e to b e g in s u c h d is c u s s io n .
@FedFRASER