Review

During the 1980s, banks and thrift institutions failed at a rate the United States has not experienced since the Great Depression. Deposits at most of these institutions were insured by the federal government, and covering the insurance liabilities has required hundreds of billions of dollars in taxpayer funds.

Federal deposit insurance was enacted in 1933 as a response to the bank failures of the Great Depression. Deposit insurance was not, however, a new policy at that time. During the 19th and early 20th centuries, many states experimented with deposit insurance systems. 

The author discusses how Federal Deposit Insurance is a classic case of the wrong solution offered for the wrong prob­lem. He seeks to protect banks against the runs to which they would be prone under laissez-faire, in which they would not have the protection deposit insurance gives them. 

Traditional banks and thrift institutions are beset by two special problems that most first other firms do not confront. The first special problem in the extreme mismatching of maturities by thrift institutions. Until recently, these institutions were expected and even encouraged to finance 30-year fixed-rate mortgages by accepting savings deposits with maturities of virtually zero. 

The author discusses the following: To what extent are banking functions part of the essential infrastructure of the economy that must be regulated or assisted by government? To what extent is banking just another industry—one that should be governed by the same rules as other industries? 

This article explores a few basic questions in deposit insurance policy. First, the author assumes that deposit insurance is essential and examines how an insurance system with some desirable attributes can be implemented. He then explores alternatives to the existing deposit insurance system and asks whether deposit insurance is really desirable in light of the implementation difficulties identified.

The author briefly described the current plan for a risk-premium structure of deposit insurance and considers some potential operational problems with it. He also reflect on the role of risk-based premiums in the context of the broader themes of the current debate over bank regulatory policy.

The Federal Deposit Insurance Corporation Improvement Act of 1991 requires federal supervisors to examine insured depository institutions annually. This article investigates whether mandatory annual examinations will make supervisors more effective in limiting losses to the Bank Insurance Fund (BIF) that result from bank failure.

During the 1980s, private-sector borrowing expanded to such an extent that many analysts became concerned that the accumulated debt would be a drag on spending, making the recession worse if and when it occurred and slowing the ensuing recovery.