Working Paper

FDICIA after five years: a review and evaluation

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

Keywords: Federal Deposit Insurance Corporation Improvement Act of 1991;

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series, Issues in Financial Regulation

Publication Date: 1997

Number: WP-97-01