FDICIA after five years: a review and evaluation

George J. Benston and George G. Kaufman

No WP-97-01, Working Paper Series, Issues in Financial Regulation from Federal Reserve Bank of Chicago

Abstract: 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.

Keywords: Federal; Deposit; Insurance; Corporation; Improvement; Act; of; 1991 (search for similar items in EconPapers)
Date: 1997
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