REFORM OF THE DEPOSIT INSURANCE SYSTEM: AN APPRAISAL OF THE FHLBB AND FDIC STUDIES

Abstract

This paper presents an appraisal of the studies of the deposit insurance system submitted to Congress by the Federal Deposit Insurance Corporation and the Federal Home Loan Bank Board in compliance with the Garn‐St. German legislation of 1982. The purpose of these studies was to assess the current structure of the deposit insurance system in light of the changes in the regulation of depository institutions mandated in recent legislationMany observers of the financial system believe that, as a result of recent regulatory changes, the deposit insurance agencies do not have sufficient power to control risk‐taking of insured institutions. These two reports present an assessment of mechanism which could be used to limit the risk of the deposit insurance agenciesThe emphasis in both reports is on ways in which the amount of market discipline applied to insured institutions could be increased. Both reports identify essentially three ways in which this might be accomplished. First, risk‐adjusted deposit insurance prices might be employed. Second, the volume of uninsured creditors might be increased, either through changes in limits of insurance coverage or through imposition of requirements for use of subordinated debt. Third, the current public deposit insurance system might be partially supplanted by one that is private. This paper evaluates the merits of each of these proposals and compares the positions taken by the FHLBB and the FDIC on the issues