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FDIC Outlook

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A Message to Our Readers
The 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.

In 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.

The 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.

Stroke-of-the-Pen 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.

Implications 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 institutions.

What 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.

Last Updated 10/12/2005 insurance-research@fdic.gov