Journal Article

The need to protect depositors of large banks, and the implications for powers and ownership

Abstract: Three fundamental and interconnected issues should be carefully considered before making any decisions on altering the federal safety net or the structure of the U.S. banking system. The first is whether or not bank depositors and other creditors can exercise timely and meaningful restraint on excessive risk-taking by bank managements. The second is whether the government should handle the orderly resolution of large bank failures in such a way that uninsured depositors and other bank creditors are protected. The third fundamental issue is the degree to which banking should continue to be insulated from other financial and nonfinancial activities. ; Drawing upon thirty-five years of experience in bank supervision and discount window administration, the author reviews these issues. He concludes that since market discipline cannot be effective in deterring excessive credit risks in banks, the authorities must continue to give all depositors of large banks at least the implicit assurance that their funds will be protected. He believes that bank involvement in investment banking and other financial activities should continue to be limited, and that nonbank entry into banking should continue to be restricted, in order to avoid broadening the federal safety net.

Keywords: Bank supervision; Deposit insurance;

Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: New England Economic Review

Publication Date: 1990

Issue: Sep

Pages: 63-75