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

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  • Catharine Lemieux

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.

Suggested Citation

  • Catharine Lemieux, 1993. "FDICIA : where did it come from and where will it take us?," Financial Industry Perspectives, Federal Reserve Bank of Kansas City, issue Nov, pages 1-13.
    • Handle: RePEc:fip:fedkfi:y:1993:i:nov:p:1-13
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    Cited by:

    1. Panos Konstas, 2005. "FDIC-Sponsored Self-Insured Depositors: Using Insurance to Gain Market Discipline and Lower the Cost of Bank Funding," Economics Working Paper Archive wp_419, Levy Economics Institute.
    2. Panos Konstas, 2006. "Reforming Deposit Insurance: The Case to Replace FDIC Protection with Self-Insurance," Economics Public Policy Brief Archive ppb_83, Levy Economics Institute.

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