THE NEED TO REFORM THE FEDERAL DEPOSIT INSURANCE SYSTEM |
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| Authors: | JAMES R. BARTH CARL D. HUDSON DANIEL E. PAGE |
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| Affiliation: | *Department of Finance, Auburn University. Earlier versions of this paper were the basis for James R. Barth's participation in a panel at the 26th Annual Conference on Bank Structure and Competition, Federal Reserve Bank of Chicago, May 9–11, 1990, and for presentation at the Western Economic Association International 65th Annual Conference, San Diego, June 29–JuIy 3, 1990, in a Contemporary Policy Issues session, “FIRREA and the Savings and Loan Crisis: One Year Later,” organized by George G. Kaufman, Loyola University, Chicago. |
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| Abstract: | The biggest financial disaster in modern history struck the savings and loan industry during the 1980s. This paper argues that the unifying cause of this debacle was the way in which the federal deposit insurance system is structured. The fundamental cause was not fraud and deregulation, as is commonly argued. The government not only permitted reportedly insolvent institutions to continue to operate, it permitted many such institutions to grow by offering relatively high rates on their deposits. Unfortunately, the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 may not prevent a similar situation from ever recurring. Therefore, one must understand exactly what happened, what the FIRREA does and does not do, and the proposals for reforming the entire structure of the federal deposit insurance system. |
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