The Role of Market‐Value Accounting in Reducing Potential Taxpayer Subsidies: The Case of Deposit Insurance

Abstract

The federal deposit insurance program required billions of dollars in taxpayer subsidies in recent years. Unless reforms are initiated soon, the program will continue to incur losses and will likely sizeable require subsidies in the future. Some of the blame for the past losses of the deposit insurance program has been attributed to the regulatory discretion and lack of information on the potential losses arising from the exercise of regulatory discretion. It is often argued that market‐value accounting can be an effective check on regulatory discretion and can minimize the future costs of the program to the taxpayers. This study examines the role market‐value accounting can play in reducing the potential taxpayer subsidies to the program. It examines the relationship between accounting system and losses to the deposit insurance program, discusses the problems in implementing the market‐value accounting, and shows how market‐value accounting can improve the effectiveness of the system of public regulation and reduce the adverse financial consequences of regulatory discretion. While the direct focus of the article is on the deposit insurance reform, the discussion and the arguments have applicability to improving the regulatory effectiveness of other public agencies and programs.