R. Dan Brumbaugh

The Reform of Federal Deposit Insurance

In the first essay, Calomiris argues that the most desirable means by which to achieve banking system stability is to permit unlimited branch banking combined with the type of privately administered formal deposit insurance programs of antebellum Indiana, Ohio, and Iowa. In the second essay, Barth and Bartholomew argue convincingly that the major culprit in the S&L crisis is the existing structure of the federal deposit insurance system. They take the view that the Financial Institutions Reform, Recovery and Enforcement Act was seriously flawed for its failure to adequately restructure the federal deposit insurance system. Brumbaugh and Litan express the view that due to the widespread use of accounting onventions to conceal balance sheet weaknesses, the number and assets of market-value insolvent banks cannot be known with any certainty. Kane argues that government deposit insurers have hidden or unacknowledged objectives and that these objectives conflict with the presumed long term goals of protecting depositors of modest means and preventing runs in a cost-effective manner. Romer and Weingast demonstrate how politicians benefited by keeping taxpayers uniformed about the thrift crisis and by establishing and enforcing a policy of forbearance. Chirinko and Guill quantitatively examine how macroeconomic shocks affect depository institutions. They argue that major problems can be encountered unless approaches to deposit-insurance reform and regulatory reform explicitly and carefully consider the impacts of such macroeconomic shocks on these institutions. Kaufman observes that, since 1974, the Federal Reserve has provided lender of last resort (LLR) assistance to prolong the life insolvent banks deemed too large to fail (TLTF). He argues that the LLR assistance in recent years has not saved most banks but has provided uninsured depositors time to flee without losses. It has frequently been argues that accounting techniques have played a significant part in the interaction of depository institutions and federal deposit insurance regulation. The last two papers in this book focus on the attributes of market-value accounting.

Pitfalls in using market prices to assess the financial condition of depository institutions

In this article we examine the information that stock prices provide about the financial condition of federally insured thrift institutions. In order to assess their financial condition from the different perspectives of stockholders and the federal insurer, we calculate the value of the put option of federal deposit insurance available to thrift institutions. Our results demonstrate that the two perspectives often provide, particularly for unhealthy institutions, quite different views of the financial condition of individual institutions.

Turmoil among depository institutions: Implications for the U.S. real estate market

Abstract Since the early 1980s, turmoil unlike any since the Great Depression has caused such unprecedented failures among federally insured banks and savings and loans (S & Ls) that the insurance funds for these institutions were driven into insolvency. The traditional commitment of S & Ls and the expanding commitment of banks to housing finance make it important to examine the implications of these record failures for the availability of owner‐occupied housing loans. The substantial commitment of banks and the more recent commitment of S & Ls to commercial real estate also necessitate an examination of the implications of depository failures on the commercial real estate market. This paper therefore will examine selected data from the past decade and assess the implications of the recent turmoil within the federally insured depository industry for the financing of U.S. real estate.

The Changing World of Banking: Setting the Regulatory Agenda

The approach taken in the 1980s, and thus far in the 1990s, to setting the regulatory agenda for banking (a term we will use to include all federally insured depositories) has been relatively narrowly focused on trying to resolve specific problems that have arisen in the deposit-insurance and bank regulatory system. The several changes in federal banking regulation in the 1980s reflect this narrow and reactive approach. These changes were largely made in five separate pieces of federal legislation — the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), the Depository Institutions Act of 1982 (Garn-St Germain), the Competitive Equality in Banking Act of 1987 (CEBA), and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). Finally, in 1991 the Federal Deposit Insurance Corporation Improvement Act (FDICIA) was enacted.