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Sneech Outline Rbbert Morris Associates April26,l99O I. Introduction tr. Deposit Insurance System & Regulation A. Ratio f. insurance insurancl has along and controver ¡ial history proposals date bacË to 1886 introduced until finally enacted in the Bank isis of the Great Depression, but only c. took I ,ur,^"d out in the last decad.e 2. I"iti"li:iå a. thought that 3 exceedingly costly banks " ' b. unfalrly subsidize poorly-managed c. even FbR said, "thä min'ute the [overnment starts to 3. guarantee bank deposits. it williun the risk of a probable Ioss." Deposit insurance was introduced at the state level in early 1800s a. ' otect communities from abrupt fluctuations in 6ank b. :äïtil'"îäS:b,îå',?rrom catastrophic ross it was never clear that this system wãs needed to bank panics or runs (eveñ if it was, the Fed can rket oþerations and the discount window) hat reÍorm must center around how much ant to afford depositors and h w much nt to subject taxpayers c. d. B. Nq' 1. of Deposit Insurance ¡tem ôf rules and regulations to protect the insurance ) and to guard ãgainst unfaír subsidies to poorly 2. b. trI. operational handicaps in a fast-paced v orld olofy ailowed unregutated interldpers to unfairly comu te fluctirations in inflation highlighted the inflexibility of a rigid system of rules and régufations 'e Price Stability and Sound Banking A. Credit analysis 1. limit bank risk are based on the value of collateral in secured loans and on proiections r f the ratio of a borrower's current assets to curreht lîabilities in unsecured loans of working capital decisi-ons to a. b. -2- 2. B. unexpected price changes can invalidate assumptions underlying the lóan; thri standardãof loan evaluation can b-e preserved undðr conditions of price stability Price instability 1. accounts-for many of the problems of financial institutions here and abroad, but also for the plight of U.S. deposit insurance t a. b. c. bank managers and shareholders are not penalized for poor managemeñt since depositors are all but ünconcerned ri'ith risk insurance ís ed for risk (flat fee) the marurer eady ssures d by the incentives of managers, ouble, to take greater and gieater risks IV. Deposit Insurance Reform A. To restore proper market discipline, federal deposit insurance coverage must be môre èorrectly priced'or limited to limit the insurance per account should be strictly observed é extended to uninsured claimants when elieve that the current statutory limit should be reduced a. for those who desire more protectiorç co-insurance could exist above the limit b. the Banking Act of 1933 included a permanent plan for co-insuranðe that was never instituted c. a reduction would be quite consistent with the maior rce -'- protection of depositors from v the average insured deposit account in both banks and thrifts is õnly about $8,000 V. Closure and the "Too Big To Fail" Doctrine A. Strict enforecment of th not extend insurance to 1. exceptions are not made 2. in párticular, the "TBTF' -3- B. Failure of any organization carries many negative corurotations, but what does it real[y mean? 1. does not mtían that the assets disappear 2. assets are relocated and put to mo.rê efficient use 3. existance of failure remoïes the need for taxpayers to prop up an unhealthv instihrtion 4. threat of failure strengthens market forces and discipline VI. Loosening of the Regulatory A. Reins Only after reform of deposit insurance and the allowance of failure for badly-managed institutìons can market incentives be expected to pertorm cial services industry be freed from B. ke would be forced to more in the outcomes of their decisions n deposits would be based on the t on ã deposit insurance subsidy C. Role of qovernment authorities would chanse 1,. wõuld not be an enforcer of rules and iestrictions, but monitor that prescribed financial obseived est financial condition hout any restrictions on their b, c. institutions falling short would be subject to some restrictions those institutions that failed to meet some minimum alize and , but would also make VII. Conclusion A. Comprehensive reform should be undertaken soon 1. 'we will never find the "best" time to institute reforms 2. present state of thrift industry should not deter efforts B. Reform should be based on re-installation of market forces ited f. away with 2. 3. C. Fed can contribute to sound financial services industryJ by adopting a monetary policy that pursues zero inflation
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