In December 1991, the U.S. Congress enacted and President George
Bush signed the Federal Deposit Insurance Corporation Improvement
Act (FDICIA). The Act was motivated by the severity of the U.S.
banking and thrift crisis of the 1980s and represented the most
important banking legislation since the Banking (Glass-Steagall)
Act, which was enacted in 1933 at the depth of the previous most
severe banking crisis in U.S. history. Between 1980 and 1991, some
1,500 commercial and savings banks, representing 10 percent of the
industry in 1980, failed and more than 1,000 savings and loan
associations, representing 25 percent of the industry, failed. In
addition, delays in resolving the failures helped to increase the
cost beyond the resources of the then Federal Savings and Loan
Insurance Corporation (FSLIC) and required the taxpayers to pay
some $150 billion To insured depositors at these
institutions. The large number and high cost of the failures were
in large measure attributable to serious flaws in the extant
government-sponsored deposit insurance program that encouraged
insured institutions to assume excessive credit and interest rate
risks and bank regulators to delay imposing corrective sanctions on
troubled institutions and resolving economically insolvent
institutions.
FDICIA attempted to correct these flaws by reforming the deposit
insurance structure through requiring regulatory prompt corrective
action (PCA) and least cost resolution (LCR). PCA mandated a series
of both discretionary and mandatory sanctions that the regulators
first may and then must apply as an institutions's financial health
progressively deteriorates as reflected in a number of
capital-to-assetratios. These sanctions are intended to encourage
the institutions to reverse their deterioration before it is too
late. But if they fail to do so, PCA requires resolution of the
institution before their book-value capital is fully depleted. This
is intended to minimize any losses from failure.
The designed PCA sanctions are modelled after the actual sanctions
that the private market typically imposes on troubled firms in
uninsured industries and that are distorted in banking by the
government-provided insurance. Thus, FDICIA attempts to supplement
regulatory and supervisory discipline with stimulated market
discipline.
Since its introduction in the United States in 1991, PCA has been
explicitly or implicity adopted in word if not spirit in many
developed and developing countries with greatly different banking
and regulatory structures. How well has it worked or could it work?
The papers also consider reinforcing or alternative prudential
techniques. Thus, they add to our storehouse of knowledge on
improving the performance of banking systems and should prove
useful to researchers, practioners, and policy-makers both in
evaluating extant regulatory structures and in designing new or
modified structures. All the papers were presented by the authors
and commented on by the discussants at invited sessions at the
annual meeting of the Western Economic Association in Seattle,
Washington in July 2002. Maia Pykina (Loyola University Chicago)
provided assistance both in arranging the session programs and in
preparing the papers for publications.
General
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