Entry and Exit of Banks in Latin America and the Caribbean: Public Policy Concerns and a Proposed Solution.

Banking authorities must resolve or otherwise deal with existing banks that are weak or insolvent without imposing costs on consumers or taxpayers. Two aspects of this concern should be delineated. First, how can banking regulations be structured so that the future exit of weak and insolvent banks would be relatively costless? Next, how can the authorities resolve existing weak and insolvent banks without imposing costs on depositors or taxpayers?

Market discipline: the role of uninsured depositors and other market participants

Deposit insurance ; Risk ; Bank failures

FDICIA after five years: a review and evaluation

At yearend 1991, Congress enacted fundamental deposit insurance reform for banks and thrifts in the FDIC Improvement Act (FDICIA). This reform followed the failure of more than 2,000 depository institutions in the 1980s. Many of these failed because of the incentive incompatibility of the structure of federal government-provided deposit insurance, which encouraged moral hazard behavior by banks and poor agent behavior by regulators. Insurance was put on a more incentive compatible basis by providing for a graduated series of sanctions that mimic market discipline and first may and then must be applied by the regulators on floundering the banks. This article reviews these changes and evaluates the early results.Federal Deposit Insurance Corporation Improvement Act of 1991

Deposit insurance reform in the FDIC Improvement Act: the experience to date

In 1991, the U.S. adopted fundamental deposit insurance reform in the FDIC Improvement Act. This article reveals why such reform was necessary in light of the severe banking crisis of the 1980s and analyzes its success to date.Federal Deposit Insurance Corporation Improvement Act of 1991

How should banks account for loan losses?

The agencies that regulate banks are involved in an ongoing debate about the appropriate way for banks and other lenders to account for default risk on loans. Accounting authorities are concerned with whether the accounting method meets the needs of general-purpose users of financial statements, particularly investors. In contrast, bank supervisors are concerned about banks being inadequately capitalized and possibly failing. ; To shed light on this debate, this article reviews the generally accepted accounting principles (GAAP) currently used, which are based on historic-cost values for assets and liabilities. It then analyzes economic-value, or fair-value, accounting, which is being discussed as a substitute. ; The analysis suggests that the reported GAAP value is likely to understate the economic value of most banks’ portfolios most of the time. The economic values of loans would be more valuable if they were reliable. However, the authors argue, the fair value of credit losses must be estimated by management and hence may be biased by managerial attempts to attain earnings and capital targets. ; The authors conclude that using the lower of historic cost or economic value for valuing the credit risk of loans would provide the most relevant adequately reliable measure of loan value and would thus be the most appropriate procedure.Bank loans ; Default (Finance) ; Accounting

Accounting Standards in the United States and the United Kingdom: Their Nature, Causes and Consequences

The purpose of this article is to account for the existence of differing accounting standards in the United States and the United Kingdom despite a common language, common practice and a fundamentally common political and economic base in the two countries. What factors explain the fact that, while accounting standards in the United States are codified and explicit, they remain on the whole uncodified and implicit in Great Britain? From which system does the investor more likely benefit? The first section of this paper begins with descriptions of auditing and reporting standards in each country. The factors which influence the establishment of accounting standards are examined in the following section. Within this second section, the inherent limitations of accounting measurements are discussed, from which some hypotheses are developed explaining the function of accounting standards and speaking to the question of why the standards are stated explicitly or implicitly. The answers to these questions are then contrasted with four environmental differences between the United States and the United Kingdom: (1) the professional environment, (2) the economic environment, (3) the regulatory environment and (4) the legal environment. Finally, the last section presents a cost-benefit analysis of explicit and implicit accounting standards for investors