Entry and Exit of Banks in Latin America and the Caribbean: Public Policy Concerns and a Proposed Solution.

Banking authorities must resolve or otherwise deal with existing banks that are weak or insolvent without imposing costs on consumers or taxpayers. Two aspects of this concern should be delineated. First, how can banking regulations be structured so that the future exit of weak and insolvent banks would be relatively costless? Next, how can the authorities resolve existing weak and insolvent banks without imposing costs on depositors or taxpayers?

Market discipline: the role of uninsured depositors and other market participants

Deposit insurance ; Risk ; Bank failures

Deposit insurance reform in the FDIC Improvement Act: the experience to date

In 1991, the U.S. adopted fundamental deposit insurance reform in the FDIC Improvement Act. This article reveals why such reform was necessary in light of the severe banking crisis of the 1980s and analyzes its success to date.Federal Deposit Insurance Corporation Improvement Act of 1991

How should banks account for loan losses?

The agencies that regulate banks are involved in an ongoing debate about the appropriate way for banks and other lenders to account for default risk on loans. Accounting authorities are concerned with whether the accounting method meets the needs of general-purpose users of financial statements, particularly investors. In contrast, bank supervisors are concerned about banks being inadequately capitalized and possibly failing. ; To shed light on this debate, this article reviews the generally accepted accounting principles (GAAP) currently used, which are based on historic-cost values for assets and liabilities. It then analyzes economic-value, or fair-value, accounting, which is being discussed as a substitute. ; The analysis suggests that the reported GAAP value is likely to understate the economic value of most banks’ portfolios most of the time. The economic values of loans would be more valuable if they were reliable. However, the authors argue, the fair value of credit losses must be estimated by management and hence may be biased by managerial attempts to attain earnings and capital targets. ; The authors conclude that using the lower of historic cost or economic value for valuing the credit risk of loans would provide the most relevant adequately reliable measure of loan value and would thus be the most appropriate procedure.Bank loans ; Default (Finance) ; Accounting

FDICIA after five years: a review and evaluation

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.Federal Deposit Insurance Corporation Improvement Act of 1991

Bank capital structure, regulatory capital, and securities innovations

Although financial instruments that, in effect, permit corporations to treat preferred stock dividends as tax-deductible interest have been used by nonfinancial corporations since late 1993, bank holding companies (BHCs) did not issue these trust-preferred securities (TPS) until 1996, when the Federal Reserve qualified them as Tier-1 capital. We delineate and test hypotheses with 1) analyses of the stock-market reaction to the Fed’s ruling and to TPS filings and 2) comparisons of BHCs that issued TPS with those that did not. We conclude that regulatory capital requirements, tax savings, and uninsured sources of funds can have significant positive effects on BHCs’ demand for capital; growth and investment opportunities have an inconclusive effect; and transaction costs have a negative effect. Our results are not consistent with the moral-hazard hypothesis.Bank capital ; Bank holding companies ; Bank supervision ; Securities

Roundtable discussion: reflection on twenty years of bank regulatory reform

In 1986 the American Bankers Association asked five banking academics to assess and recommend policy options to improve the banking system's efficiency, performance, and safety. The report these five economists produced, Perspectives on Safe and Sound Banking: Past, Present, and Future, has in many ways served as a roadmap for ensuing bank regulatory reforms. In this roundtable discussion, each of the five authors reflects on the past twenty years and the current status of the banking industry and, in some cases, shares thoughts about the industry's future direction.Banks and banking ; Bank supervision