“Analysis of Federal Deposit Insurance Corporation (FDIC) And the Bank Failure Rate” Heather Squires

FDIC Present Established in the Banking Act of 1933 as a result of bank panics during the Great Depression Today: “FDIC supervises banks, insures deposits up to $100,000 and helps maintain a stable and sound banking system” (FDIC Website)

Why? Bank Failures during the 1980’s were caused by the FDIC, or were they? Incentives towards risk~ Moral Hazard Who pays? FDICIA in 1991

Previous Research Barth and Brumbaugh (early 1990’s) Claimed the FDIC caused the increase in bank failure as a result of insurance rising from $40,000 to $100,000 FDIC led to a “heads I win, tails the federal insurer loses” Concluded bank failures were a result of the federal deposit insurance

More Research Cebula and Belton (1997) Follow-Up study on the effects of the FDICIA Again found FDIC was a major component of bank failures Determined FDICIA had directly decreased the bank failure rate

Still More Research Saltz (He had to be different) Didn’t agree with the previous researchers and did it his way Cointegration technique, eigenvalues, trace effects~ TOO MUCH CALCULUS! What did he find after all of that work? The SAME thing~ FDIC caused bank failures during the 1980’s

My Model A simple linear regression

Results

More…

Finally…

Did the FDICIA work? Bank failure rates have decreased

Conclusions Since 1991 the bank failure rate has decreased significantly Economic Boom Low Interest Rates Higher Capital to Asset Ratios

What’s Next? Federal Deposit Insurance Improvement Act of 2005 Removed all restrictions on imposing risk-based premiums Now insures up to $250,000 for retirement accounts

Questions?