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A Message to Our Readers
FDIC community extends its deepest sympathy to the victims
of Hurricane Katrina and Hurricane Rita. The articles in
this edition of the FDIC Outlook were prepared
before the hurricanes struck the Gulf Coast. We will assess
the economic implications of these tragic events in future
editions of the Outlook. The public can rest assured
that their federally insured deposits are fully protected—their
money is safe in FDIC-insured institutions.
Focus This Quarter: Stroke-of-the-Pen Risk
This issue of FDIC Outlook focuses on a special class of risks related
to policy changes that arise outside the realm of banks and their regulation.
Termed “stroke-of-the-pen” risks, these policy changes may
have significant, unintended, and unexpected negative consequences for
the U.S. banking industry. FDIC analysts explore the spillover effects
that changes in monetary policy, the tax code, accounting rules, and other
policies can sometimes impose on insured depository institutions.
Stroke of the Pen: A Unique Class of Risks to Insured Financial Institutions
Risk assessment that focuses on market, credit, and operational risk may
overlook stroke-of-the-pen risks that expose FDIC-insured institutions
to a wide range of events that originate outside the financial services
sector. This article introduces the concept of stroke-of-the-pen risk
and looks at its unique applicability to the banking industry.
Risk: An Historical Perspective
Risks to the banking industry have sometimes emerged from unexpected
sources. This article focuses on three historic policy shifts that significantly
affected FDIC-insured institutions: a 1979 shift in Federal Reserve monetary
policy that led to dramatic increases in interest rates, enactment of
the Tax Reform Act of 1986, and implementation of Financial Accounting
Statement 125 during the mid- to late 1990s. The authors argue that while
each of these policy changes served a clear and important purpose, each
also contributed to a more challenging operating environment for banks
that ultimately led to financial losses for a segment of the industry.
of the Sarbanes-Oxley Act for Public Companies and the U.S. Banking Industry
The unanticipated collapse of several large, high-profile corporations—including
Enron, Tyco, and WorldCom—in 2001 and
2002 contributed to a crisis of investor confidence and prompted far-reaching
legislative and regulatory reform. The Sarbanes-Oxley Act of 2002 (SOX)
represents a cornerstone of this reform effort. However, its impact on
corporate America is only beginning to be understood. Could this monumental
stroke of the pen pose risks to depository institutions? This article
surveys the effects of SOX on public companies, including FDIC-insured
Does the Future Hold for U.S. Agricultural Subsidies?
The strong recent financial performance of the U.S. agricultural sector
and FDIC-insured farm banks rests somewhat precariously on federal policies
that heavily subsidize farm producers. This tends to make both farmers
and their bankers vulnerable to a legislative stroke of the pen that might
alter these policies. Pressure to cut U.S. farm subsidies has been building
as a result of both the ongoing World Trade Organization negotiations
and the presence of a large federal budget deficit. This article examines
how farm program cutbacks might affect farmers and their lenders.