“analysis of federal deposit insurance corporation (fdic) and the bank failure rate” heather...
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![Page 1: “Analysis of Federal Deposit Insurance Corporation (FDIC) And the Bank Failure Rate” Heather Squires](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d605503460f94a414ff/html5/thumbnails/1.jpg)
“Analysis of Federal Deposit Insurance Corporation
(FDIC) And the Bank Failure Rate”
Heather Squires
![Page 2: “Analysis of Federal Deposit Insurance Corporation (FDIC) And the Bank Failure Rate” Heather Squires](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d605503460f94a414ff/html5/thumbnails/2.jpg)
FDIC 1933- 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)
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Why?
Bank Failures during the 1980’s were caused by the FDIC, or were they?Incentives towards risk~ Moral
HazardWho pays?FDICIA in 1991
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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
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More Research
Cebula and Belton (1997)Follow-Up study on the effects of
the FDICIA Again found FDIC was a major
component of bank failuresDetermined FDICIA had directly
decreased the bank failure rate
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Still More Research
Saltz (He had to be different)Didn’t agree with the previous
researchers and did it his wayCointegration 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
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My Model
A simple linear regression
0 1 2 2 2 3 2 4 2 5 13t t t t t tBFR x x FDIC x COST x CAR x Year x GDP u
0
2
2
the constant term the percentage of federally insured banks in year that were closed or merged
the extent of federal insurance coverage in year 2 = the
t
t
t
xBFR tFDIC tCOST
2
2
real average cost of deposits at commercial banks in year 2 = the equity capital-to-total asset ratio in year 2
3 = the real average interest rate for a three-year Treasury bit
t
tCAR tYear
1
ll in year 2 = the percentage growth of real GDP for year 1
= the error termt
tGDP tu
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Results
1981-19912 2 2
2 1
2
10.223 0.188 0.0403 2.047
(6.52) (0.822) (0.195) (2.045)
0.0742(3 ) .0038 .3230
(1.101) (.0677)
R 0.85
t t t t
t t
BFR FDIC COST CAR
Year GDP
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More…
1981-2005
2 2 2
2 1
4.375 0.050 0.2736 0.457 (1.306) (0.1743) (0.092) (0.134)
0.3141(3 ) .0329 .3092
(0.0709) (.0403)
t t t t
t t
BFR FDIC COST CAR
Year GDP
2R 0.74
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Finally…
1992-2005
2 2 2
2 1
1.999 0.1351 0.1604 0.2038 (0.967) (0.1102) (0.0436) (0.108)
0.1284(3 ) .0274 .0672
(0.0512) (.01
t t t t
t t
BFR FDIC COST CAR
Year GDP
2
511)
R 0.97
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Did the FDICIA work?
Bank failure rates have decreased Bank Failure Rate
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004
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Conclusions
Since 1991 the bank failure rate has decreased significantlyEconomic BoomLow Interest RatesHigher Capital to Asset Ratios
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What’s Next?
Federal Deposit Insurance Improvement Act of 2005Removed all restrictions on
imposing risk-based premiumsNow insures up to $250,000 for
retirement accounts
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Questions?