Banking and currency crisis and systemic risk: lessons from recent events

Banking and currency crises have done severe economic damage in many countries in recent years. This article examines the causes and characteristics of these crises and the public policies intended to prevent them or mitigate their adverse consequences.Financial crises ; Bank failures ; Money ; Public policy

Variable rate residential mortgages: the early experience from California

Adjustable rate mortgages ; California

A proposal for efficiently resolving out-of-the-money swap positions at large insolvent banks

Recent evidence suggests that bank regulators appear to be able to resolve insolvent large banks efficiently without either protecting uninsured deposits through invoking "too-big-to-fail" or causing serious harm to other banks or financial markets. But resolving swap positions at insolvent banks, particularly a bank's out-of-the-money positions, has received less attention. The FDIC can now either repudiate these contracts and treat the in-the-money counterparties as at-risk general creditors or transfer the contracts to a solvent bank. Both options have major drawbacks. Terminating contracts abruptly may result in large-fire sale losses and ignite defaults in other swap contracts. Transferring the contracts both is costly to the FDIC and protects the counterparties, who would otherwise be at-risk and monitor their banks. This paper proposes a third option that keeps the benefits of both options but eliminates the undesirable costs. It permits the contracts to be transferred, thus avoiding the potential for fire-sale losses and adverse spillover, but keeps the insolvent bank's in-the-money counterparties at-risk, thus maintaining discipline on banks by large and sophisticated creditors.Deposit insurance ; Federal Deposit Insurance Corporation ; Swaps (Finance)

Depositor liquidity and loss-sharing in bank failure resolutions

Bank failures are widely feared for a number of reasons, including concern that depositors may suffer both losses in the value of their deposits (credit losses) and, possibly more importantly, restrictions in access to their deposits (liquidity losses). In the United States, this is not true for insured deposits, which are fully protected and made available to the depositor almost immediately. But both problems may occur for uninsured depositors. Thus, there is pressure on regulators to protect all depositors in bank failures. This is likely to increase both moral hazard risk-taking by banks and poor agency behavior by regulators with large ultimate costs to taxpayers. While ways of reducing the credit loss in bank failures have been widely examined, reducing liquidity losses has received far less attention. One way to mitigate this loss to uninsured depositors is to make the estimated recovery value of their deposits quickly available to them upon failure of the bank through an advance dividend or other payment by the FDIC secured by the bank's assets. Quick depositor access was suggested as a superior solution to deposit insurance in alleviating adverse effects from bank failures during the debate on deposit insurance in the early 1900s and was actually put into effect by both the Reconstruction Finance Corporation and the New York State Banking Department shortly before the establishment of the FDIC. More recently, the FDIC has experimented with the concept. This paper analyzes the pros and cons of providing quick depositor access to deposits at failed banks and reviews the history of the concept. It concludes that such a policy would greatly enhance the FDIC's ability to resolve large bank insolvencies without having to protect uninsured depositors through too-big-to-fail policies.Liquidity (Economics) ; Bank deposits ; Bank failures

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

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

Bank procyclicality, credit crunches, and asymmetric monetary policy effects: a unifying model

Much concern has recently been expressed that both large, procyclical changes in bank assets and "credit crunches" caused by bank reluctance to expand loans during recessions contribute to economic instability. These effects are difficult to explain using the standard textbook model of deposit expansion in which deposits are constrained only by reserve requirements. However, these effects follow easily if the model is expanded to include a second, capital constraint.Bank assets ; Monetary policy

Post-resolution treatment of depositors at failed banks: implications for the severity of banking crises, systemic risk, and too-big-to-fail

Bank failures are widely viewed in all countries as more damaging to the economy than the failure of other firms of similar size for a number of reasons. The failures may produce losses to depositors and other creditors, break long-standing bank-customers loan relationships, disrupt the payments system, and spillover in domino fashion to other banks, financial institutions and markets, and even to the macroeconomy (Kaufman, 1996). Thus, bank failures are viewed as potentially more likely to involve contagion or systemic risk than the collapse of other firms. The risk of such actual or perceived damage is often a popular justification for explicit or implicit government-provided or sponsored safety nets under banks, including explicit deposit insurance and implicit government guarantees, such as "too-big-to-fail" (TBTF), that may protect de jure uninsured depositors and possibly other bank stakeholders against some or all of the loss.Bank failures ; Deposit insurance

¿Cómo se deberían estructurar las instituciones y los mercados financieros? Análisis y opciones de diseño de sistemas financieros

(Disponible en idioma inglés únicamente) En este trabajo se analizan las consecuencias de estructuras financieras alternativas para la eficiencia y la estabilidad financieras. La atención se centra en la estructura organizativa de los bancos. Las estructuras bancarias alternativas varían desde bancos especializados de ámbito restringido hasta bancos universales de ámbito mucho más amplio. Cada estructura bancaria se evalúa según su capacidad de satisfacer los objetivos de eficiencia y estabilidad en la estabilidad del sistema financieros, las economías de escala y alcance, la competencia, evitar los excesos regulatorios, los conflictos de intereses y la manipulación política, el control empresarial y la gestión de crisis financieras, y el control monetario. Ninguna reforma sirve para todos los países por igual y ninguna reforma garantiza por sí sola el logro o el mantenimiento de los objetivos.