Journal Article

FDICIA : where did it come from and where will it take us?

Abstract: The purpose of the Federal Deposit Insurance Corporation Improvement Act of 1991 was to provide additional resources to the Bank Insurance Fund and reduce the cost and likelihood of future failures. While the Act does accomplish these objectives, the changes it makes to bank supervision have the potential to affect banking's traditional safety net. ; This article discusses three provisions contained in FDICIA that could affect financial stability: prompt corrective action, least cost resolution, and liquidity support for troubled banks. While these provisions attempt to reduce the risky activities of troubled banks and force banks to promptly deal with problems, changes of this magnitude will alter the way depositors, investors, and bank management operate. These changes can have a negative impact on financial stability, particularly during an economic downturn. This article suggests that the limits FDICIA places on a troubled bank's ability to access sources of liquidity, combined with increased depositor discipline, will make it more difficult for banks to weather periods of economic uncertainty.

Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Financial Industry Perspectives

Publication Date: 1993

Issue: Nov

Pages: 1-13