1. Chapter 18 Appendix 1 Evaluating FDICIA and Other Proposed Reforms of the Banking Regulatory System

2. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-1 Limits on the Scope of Deposit Insurance FDICIA’s reduction of the scope of deposit insurance ─ Limit insurance on brokered deposits ─ Restrict too-big-to-fail policy Result? Increased losses to uninsured depositors.

3. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-2 Limits on the Scope of Deposit Insurance Further suggestions for policy ─ Reduce deposit insurance from $250,000 to $50,000 or lower ─ Coinsurance – say only 90% of deposits insured ─ Eliminate too-big-to-fail altogether

4. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-3 Limits on the Scope of Deposit Insurance Critics of new policies ─ Depositors really unable to monitor banks ─ Runs from fear can lead to the failure of a solvent bank ─ Eliminating too-big-to-fail could lead to panics ─ Letting big banks fail is difficult in practice – who handles the asset sales?

5. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-4 Prompt Corrective Action FDICIA uses sticks and carrots to manage bank capital ─ Well-capitalized – earn privileges ─ Under-capitalized – more examinations Could close banks when capital is low, but not zero Current and proposed laws may have problems; likely to reduce losses to FDIC

6. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-5 Risk-Based Insurance Premiums FDIC premiums based on asset risk and level of capital Why not? ─ Measuring asset risk is difficult ─ Need to account for credit risk and general interest rate risk

7. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-6 Other FDICIA Provisions Annual bank examinations Give Fed greater resources / ability to monitor foreign banks in the US Increase reporting requirements

8. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-7 Other Proposed Changes in Banking Regulation Regulatory Consolidation ─ FDIC, OCC, Thrift Supervision, the Fed, and state authorities regulate banks ─ Attempt to consolidate in mid-1990s failed in Congress, but will come up again

9. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-8 Other Proposed Changes in Banking Regulation Market-Value Accounting for Capital ─ Change book values to market values, possibly for all assets and liabilities ─ Some assets/debts difficult to value ─ Cost / benefit of noisy estimates of value not clear

10. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-9 Overall Evaluation Changes are heading in the right direction More needs to be done to improve incentives for banks to take on less risk and hold more capital Eliminating deposit insurance and too-big- to-fail might be going too far