Chairman
L. William Seidman
Division of Research
and Statistics.
Director
Win. Roger Watson
Editor
Seorge F. French
Editorial Committee
Frederick S. Cams
Arthur J Murton
Lynn A. Nejenthleb
Administrative
Manager
Detta Voesar
Editorial Secretary
Cathy Wright
Design and Production
Design and Printing
Unit
The views expressed arc
those of the authors and
do not necessarily reflect
official positions of [he
Federal Deposit Insurance
Corporation. Articles may
be reprinled or abstracted
if the FDIC Banking Re
view and author(s) are
credited. Please provide
the FDlC's Division of Re
search and Statistics with
a copy of any publications
containing reprinted
material.
Single-copy subscriptions
are available to the public
free of charge. Requests
for subscriptions, back
issues or address changes
should be mailed to: FDIG
Banking Review, Office of
Corporate Communica
tions, Federal Deposit In
surance Corporation 550
17th Street, N.W., Wash
ington, D.C. 20429.
Federal Deposit Insurance Corporation
FDIC
Banking
Review
Fall 1990
Vol. 3, No. 1
Failure-Resolution Methods and Policy Considerations page 1
by John F. Bovenzi and Maureen E. Muldoon
The authors are, respectively, Deputy to the Chairman of the FDIC, and Financial Analyst in
the FDlC's Division of Research and Statistics. In this paper the FDIC's methods for handling
bank failures are examined and policy objectives and concerns are detailed. This is followed
by a discussion of the difficult trade-offs that exist among sometimes competing policy goals,
and how the various failure-resolution methods affect the achievement of these goals. The
discussion is illustrated with a review of recent transactions involving large banks.
An Overview of the U.S. Credit Union Industry page 12
by Alane K. Moysich
The author is a Financial Analyst in the FDIC's Division of Research and Statistics. This
article provides information on the history, growth, regulation and insurance of credit unions
in the United States. The current condition of the credit union industry, and its insurance
fund, also are discussed. The author traces the evolution of the common bond requirement,
and summarizes arguments for and against tax-exemption. She concludes that the financial
condition of the industry generally appears good, but that recent events underscore the need
for high-quality examination and supervision.
Kisk-Based Capital Requirements: Reshaping the Thrift Industry page 27
by Peter J. Elmer
The author is a Financial Economist in the Office of Research and Statistics of the Resolution
Trust Corporation. He estimates that almost half the assets of non-eonservatorship thrifts are
in thrifts that do not meet their capital requirements, while almost three-fourths of the assets
of non-conservatorship thrifts are in thrifts that do not now meet the standards that ul
timately will be required. He points out that thrifts not meeting the requirements are not
doomed to failure, but that absent a major improvement in performance, options available to
many appear limited to some combination of shrinkage, mergers with healthier institutions or
attracting outside capital.
Recent Developments Affecting Depository Institutions page 36
by Benjamin B. Christopher
The author is a Financial Economist in the FDIC's Division of Research and Statistics, who
contributes this regular section of the FDIC Banking Review.
L. William Seidman
Division of Research
and Statistics.
Director
Win. Roger Watson
Editor
Seorge F. French
Editorial Committee
Frederick S. Cams
Arthur J Murton
Lynn A. Nejenthleb
Administrative
Manager
Detta Voesar
Editorial Secretary
Cathy Wright
Design and Production
Design and Printing
Unit
The views expressed arc
those of the authors and
do not necessarily reflect
official positions of [he
Federal Deposit Insurance
Corporation. Articles may
be reprinled or abstracted
if the FDIC Banking Re
view and author(s) are
credited. Please provide
the FDlC's Division of Re
search and Statistics with
a copy of any publications
containing reprinted
material.
Single-copy subscriptions
are available to the public
free of charge. Requests
for subscriptions, back
issues or address changes
should be mailed to: FDIG
Banking Review, Office of
Corporate Communica
tions, Federal Deposit In
surance Corporation 550
17th Street, N.W., Wash
ington, D.C. 20429.
Federal Deposit Insurance Corporation
FDIC
Banking
Review
Fall 1990
Vol. 3, No. 1
Failure-Resolution Methods and Policy Considerations page 1
by John F. Bovenzi and Maureen E. Muldoon
The authors are, respectively, Deputy to the Chairman of the FDIC, and Financial Analyst in
the FDlC's Division of Research and Statistics. In this paper the FDIC's methods for handling
bank failures are examined and policy objectives and concerns are detailed. This is followed
by a discussion of the difficult trade-offs that exist among sometimes competing policy goals,
and how the various failure-resolution methods affect the achievement of these goals. The
discussion is illustrated with a review of recent transactions involving large banks.
An Overview of the U.S. Credit Union Industry page 12
by Alane K. Moysich
The author is a Financial Analyst in the FDIC's Division of Research and Statistics. This
article provides information on the history, growth, regulation and insurance of credit unions
in the United States. The current condition of the credit union industry, and its insurance
fund, also are discussed. The author traces the evolution of the common bond requirement,
and summarizes arguments for and against tax-exemption. She concludes that the financial
condition of the industry generally appears good, but that recent events underscore the need
for high-quality examination and supervision.
Kisk-Based Capital Requirements: Reshaping the Thrift Industry page 27
by Peter J. Elmer
The author is a Financial Economist in the Office of Research and Statistics of the Resolution
Trust Corporation. He estimates that almost half the assets of non-eonservatorship thrifts are
in thrifts that do not meet their capital requirements, while almost three-fourths of the assets
of non-conservatorship thrifts are in thrifts that do not now meet the standards that ul
timately will be required. He points out that thrifts not meeting the requirements are not
doomed to failure, but that absent a major improvement in performance, options available to
many appear limited to some combination of shrinkage, mergers with healthier institutions or
attracting outside capital.
Recent Developments Affecting Depository Institutions page 36
by Benjamin B. Christopher
The author is a Financial Economist in the FDIC's Division of Research and Statistics, who
contributes this regular section of the FDIC Banking Review.
Failure-Resolution Methods
Failure-Resolution Methods
and Policy
Considerations
by John F. Bovenzi and Maureen E. Muldoon*
In competitive markets, some
institutions prosper while
others do not. The evolution of
the financial-services industry has
forced banks and thrift institutions
to operate in a highly competitive
marketplace, one in which not
every institution can survive. Prom
a public-policy standpoint, the fail
ure of an individual bank or thrift is
not a great concern. It is the re
sponsibility of the bank regulatory
agencies, including the Federal De
posit Insurance Corporation
(FDIC), to maintain public con
fidence and stability in the entire
banking system, rather than in any
individual bank or thrift within that
system. The survival of the fittest
produces a healthier, more efficient
industry. Nevertheless, the manner
in which individual institutions are
handled as they approach, and then
reach, the point of insolvency can
have important implications for the
stability of the entire banking sys
tem, and for the long-term health
and viability of the deposit insurer.
These considerations warrant a
careful review of the policies and
procedures used by the FDIG to
handle failing and failed insti
tutions. In this article, the FDIC's
traditional methods of handling
bank failures are examined and pol
icy objectives and concerns are de
tailed. This is followed by a discus
sion of the trade-offs that exist
among the sometimes competing
policy goals, and how the various
failure-resolution methods affect
the achievement of these objec
tives. The discussion is illustrated
with a review of recent large-bank
transactions. These transactions
highlight how the FDIC's recently
acquired powers to establish bridge
banks, to use pro rata payments
more widely, and to impose liability
on banks operating under common
control (cross-guarantees) have
given the FDIC greater flexibility to
meet its policy objectives.
Policy Consideratiotis'
The FDIC has several primary ob
jectives when determining the most
appropriate failure-resolution
method. First and foremost is the
need to maintain public confidence
and stability in the banking system.
The deposit insurer must be aware
that its handling of a particular fail
ure may have adverse implications,
and that failure-resolution methods
that unnecessarily risk destabilizing
the banking system should be
avoided. Second, there is a need to
encourage market discipline against
risk-taking. The methods used to
resolve bank failures have im
plications for the amount of dis
cipline exerted by market par
ticipants against risk-taking by
other banks. Failure-resolution
policies influence the probability
and size of toss that claimants may
incur. In turn, these factors in
fluence the degree to which any
particular group of claimants will
monitor and attempt to control a
bank's risk-taking. Third, the
failure-resolution method should be
cost-effective. Unless the institution
is considered essential to the com
munity, the FDIC is required to
meet a statutory "cost test" in
which it must be reasonably sat
isfied that the alternative pursued is
not more costly than a deposit pay
off. Fourth, the FDIC should be as
equitable and consistent as possible
in its failure-resolution policies. In
recent years, the most prominent
equity issue has been the treatment
of uninsured depositors and other
general creditors in large versus
small banks.
There are at least two secondary
objectives of hank failure-resolution
policies. The first of these objec
tives is to minimize disruption to
the community where the insolvent
institution is located. This requires
transactions that can be im
plemented swiftly and smoothly.
* John F. Bovenzi is Deputy to the Chairman
of the Federal Deposit Insurance Corporation.
Maureen E. Muldoon is a Financial Analyst in
the Division of Research and Statistics. The
authors would like to thank the many people
who offered helpful comments and sugges
tions, particularly George E. French and
Arthur J. Murton. The authors are responsible
for any remaining errors.
1 For an additional discussion of policy ob
jectives and failure-resolution methods, see
John F. Bovenzi and Arthur J. Murton, "Resolu
tion Costs of Bank Failures," FDIC Banking
Review 1 (Pall 1988): 1-13.
Failure-Resolution Methods
and Policy
Considerations
by John F. Bovenzi and Maureen E. Muldoon*
In competitive markets, some
institutions prosper while
others do not. The evolution of
the financial-services industry has
forced banks and thrift institutions
to operate in a highly competitive
marketplace, one in which not
every institution can survive. Prom
a public-policy standpoint, the fail
ure of an individual bank or thrift is
not a great concern. It is the re
sponsibility of the bank regulatory
agencies, including the Federal De
posit Insurance Corporation
(FDIC), to maintain public con
fidence and stability in the entire
banking system, rather than in any
individual bank or thrift within that
system. The survival of the fittest
produces a healthier, more efficient
industry. Nevertheless, the manner
in which individual institutions are
handled as they approach, and then
reach, the point of insolvency can
have important implications for the
stability of the entire banking sys
tem, and for the long-term health
and viability of the deposit insurer.
These considerations warrant a
careful review of the policies and
procedures used by the FDIG to
handle failing and failed insti
tutions. In this article, the FDIC's
traditional methods of handling
bank failures are examined and pol
icy objectives and concerns are de
tailed. This is followed by a discus
sion of the trade-offs that exist
among the sometimes competing
policy goals, and how the various
failure-resolution methods affect
the achievement of these objec
tives. The discussion is illustrated
with a review of recent large-bank
transactions. These transactions
highlight how the FDIC's recently
acquired powers to establish bridge
banks, to use pro rata payments
more widely, and to impose liability
on banks operating under common
control (cross-guarantees) have
given the FDIC greater flexibility to
meet its policy objectives.
Policy Consideratiotis'
The FDIC has several primary ob
jectives when determining the most
appropriate failure-resolution
method. First and foremost is the
need to maintain public confidence
and stability in the banking system.
The deposit insurer must be aware
that its handling of a particular fail
ure may have adverse implications,
and that failure-resolution methods
that unnecessarily risk destabilizing
the banking system should be
avoided. Second, there is a need to
encourage market discipline against
risk-taking. The methods used to
resolve bank failures have im
plications for the amount of dis
cipline exerted by market par
ticipants against risk-taking by
other banks. Failure-resolution
policies influence the probability
and size of toss that claimants may
incur. In turn, these factors in
fluence the degree to which any
particular group of claimants will
monitor and attempt to control a
bank's risk-taking. Third, the
failure-resolution method should be
cost-effective. Unless the institution
is considered essential to the com
munity, the FDIC is required to
meet a statutory "cost test" in
which it must be reasonably sat
isfied that the alternative pursued is
not more costly than a deposit pay
off. Fourth, the FDIC should be as
equitable and consistent as possible
in its failure-resolution policies. In
recent years, the most prominent
equity issue has been the treatment
of uninsured depositors and other
general creditors in large versus
small banks.
There are at least two secondary
objectives of hank failure-resolution
policies. The first of these objec
tives is to minimize disruption to
the community where the insolvent
institution is located. This requires
transactions that can be im
plemented swiftly and smoothly.
* John F. Bovenzi is Deputy to the Chairman
of the Federal Deposit Insurance Corporation.
Maureen E. Muldoon is a Financial Analyst in
the Division of Research and Statistics. The
authors would like to thank the many people
who offered helpful comments and sugges
tions, particularly George E. French and
Arthur J. Murton. The authors are responsible
for any remaining errors.
1 For an additional discussion of policy ob
jectives and failure-resolution methods, see
John F. Bovenzi and Arthur J. Murton, "Resolu
tion Costs of Bank Failures," FDIC Banking
Review 1 (Pall 1988): 1-13.