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