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Did FDICIA enhance market discipline on community banks? a look at evidence from the jumbo-CD market

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Abstract

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) directed the FDIC to resolve bank failures in the least costly manner, shifting more of the failure-resolution burden to jumbo-CD holders. We examine the sensitivity of jumbo-CD yields and runoffs to failure risk before and after FDICIA. We also examine the economic significance of estimated risk sensitivities before and after the Act, looking at the implied impact of risk on bank funding costs and profits. The evidence indicates that yields and runoff were sensitive to risk before and after FDICIA, but that this sensitivity, which was always economically small, did not differ significantly across the two sample periods. We conclude that, despite FDICIA, the jumbo-CD market puts little pressure on banks to contain risk. This finding weakens the case for market discipline as a reliable pillar of bank supervision.

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  • John R. Hall & Thomas B. King & Andrew P. Meyer & Mark D. Vaughan, 2002. "Did FDICIA enhance market discipline on community banks? a look at evidence from the jumbo-CD market," Supervisory Policy Analysis Working Papers 2002-04, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlsp:2002-04
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    Cited by:

    1. Thomas B. King, 2008. "Discipline and Liquidity in the Interbank Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2‐3), pages 295-317, March.
    2. John R. Hall & Thomas B. King & Andrew P. Meyer & Mark D. Vaughan, 2002. "Do jumbo-CD holders care about anything?," Supervisory Policy Analysis Working Papers 2002-05, Federal Reserve Bank of St. Louis.
    3. Semenova, Maria & Sokolov, Vladimir & Benov, Alexander, 2024. "Bank runs and media freedom: What you don’t know won’t hurt you?," Journal of Financial Stability, Elsevier, vol. 74(C).
    4. Thomas B. King, 2003. "Discipline and liquidity in the market for federal funds," Supervisory Policy Analysis Working Papers 2003-02, Federal Reserve Bank of St. Louis.
    5. Klaus Schaeck, 2008. "Bank Liability Structure, FDIC Loss, and Time to Failure: A Quantile Regression Approach," Journal of Financial Services Research, Springer;Western Finance Association, vol. 33(3), pages 163-179, June.
    6. R. Alton Gilbert & Andrew P. Meyer & Mark D. Vaughan, 2002. "Can feedback from the jumbo-CD market improve off-site surveillance of community banks?," Supervisory Policy Analysis Working Papers 2002-08, Federal Reserve Bank of St. Louis.
    7. Ghassan Omet & Ibrahim Saif & Hadeel Yaseen, 2008. "Market Discipline and Deposit Insurance: Evidence from Some Middle Eastern Banks," Working Papers 391, Economic Research Forum, revised 01 Jan 2008.

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