Deposit Insurance: An Annotated Bibliography, Update: 2000–2003 FEDERAL DEPOSIT INSURANCE CORPORATION Foreword In 2000, the Federal Deposit Insurance Corporation (FDIC) published Deposit Insurance: An Annotated Bibliography, 1989–1999, a compilation of a decade’s worth of deposit insurance-related research into one comprehensive reference source. The Annotated Bibliography is part of the FDIC’s ongoing effort to assist policy makers and regulators around the world in the design and operation of deposit insurance systems and to promote additional research into deposit insurance issues. This Update of the deposit insurance bibliography contains relevant materials for calendar years 2000–2003. As per the original, this Update includes citations and abstracts for books, journal articles, working papers, dissertations, conference proceedings, congressional hearings, and government and international agency reports that focus on deposit insurance. The Update is available in a printer-friendly Portable Document Format (PDF). Search and printing instructions are provided. Copies of materials listed in the Update can be obtained from any reference library or through standard interlibrary loan procedures. Users may refer to the Preface of the original edition of the Annotated Bibliography for more details about concerning the purpose, scope, and sources of the bibliography. This information documentation can be found at: http://www.fdic.gov/deposit/deposits/international/bibliography/index.html. KENNETH D. JONES Senior Financial Economist STEVEN J. MCGINNIS Economic Research Assistant ELIZABETH P. WILLIAMS Economic Research Assistant Acknowledgements The compilers are once again indebted to Alicia Amiel, Reference Librarian, whose contributions to the search process were instrumental, and to Jane Lewin, for her editorial work. Gratitude and recognition is also due Geri Bonebrake for graphic design and page layout. Deposit Insurance: An Annotated Bibliography, Update: 2000–2003 Table of Contents Foreword i Acknowledgments ii Acronyms v 1.General Deposit Insurance Theory and Policy 1 2. Designing and Establishing Deposit Insurance Systems 4 3. Pricing and Valuation of Insured Depository Institutions 12 4. Regulation and Supervision of Insured Depository Institutions 16 5. Role of Deposit Insurance in Bank Failures 35 6. Economics of Deposit Insurance 40 7. Deposit Insurance and Moral Hazard, Risk, and Incentives 57 8. Safety Nets, Deposit Insurance, and Subsidies 62 9. Deposit Insurance Systems: Country-or Region-Specific 69 10. Deposit Insurance Reform in the United States: Pre-FDICIA 81 11. Deposit Insurance Reform in the United States: Post-FDICIA 82 12. Legal Aspects of Deposit Insurance 90 13. Too Big to Fail 91 14. FDIC-Administered Insurance Funds 95 Acronyms AGDL Deposit Guarantee Association of Luxembourg AM Asset Maintenance BIF Bank Insurance Fund C&I Commercial and Industrial CAMEL Capital, Asset, Management, Earnings, and Liquidity CDIC Canada Deposit Insurance Corporation CEPR Centre for Economic Policy Research CPA Certified Public Accountant DIF Deposit Insurance Fund (of Bulgaria) DIC Deposit Insurance Corporation DIS Deposit Insurance System BIS Bank for International Settlements CDIC Canada Deposit Insurance Corporation CEC Commission of the European Community EC European Community ECU European Currency Unit EU European Union EWS Early Warning Systems Fannie Mae Federal National Mortgage Association Freddie Mac Federal Home Loan Mortgage Corporation FSAP Financial Sector Assessment Programs FDIC Federal Deposit Insurance Corporation FDICIA Federal Deposit Insurance Corporation Improvement Act of 1991 FIRREA Financial Institutions Reform, Recovery, and Enforcement Act of 1989 FITD Fondo Interbancario di Tutela dei Depositi FHLB Federal Home Loan Bank FOBAPROA The Fund for the Protection of Bank Savings FRB Federal Reserve Bank FSLIC Federal Savings and Loan Insurance Corporation GAO General Accounting Office GDIA Government Deposit Insurance Agency GDP Gross Domestic Product GMM Generalized-Method-of-Moments GSE Government-Sponsored Enterprise IADI International Association of Deposit Insurers IFS International Financial System IMF International Monetary Fund IPAB Bank Savings Protection Institute LTCM Long Term Capital Management MIMIC Mutual Insurance Model with Incentive Compatibility MMMF Money Market Mutual Fund MODIS Market Oriented Deposit Insurance Scheme NAFTA North American Free Trade Agreement NBH National Bank of Hungary OCC Office of the Comptroller of the Currency OECD Organization for Economic Co-operation and Development OMB Office of Management and Budget PCA Prompt Corrective Action RFC Reconstruction Finance Corporation RTC Resolution Trust Corporation ROC Republic of China S&Ls Savings and Loan Associations SADIS South African Deposit Insurance Scheme SAIF Savings Association Insurance Fund SEACEN South East Asian Central Banks Research and Training Centre SEDESA Seguro de Depósitos Sociedad Anónima SEER System for Estimating Examination Ratings SFRC Shadow Financial Regulatory Committee SND Subordinated Notes and Debentures TBTF Too Big to Fail TEK Hellenic Deposit Guarantee Fund Annotated Bibliography Update: 2000–2003 1. General Deposit Insurance Theory and Policy Entries in this section are more general than entries in the other sections and have a broader perspective on deposit insurance issues. They examine government-provided deposit insurance, alternative insurance structures and regimes, historical background, and budgeting accounting issues. Chai, Jingqing, and R. B. Johnston. 2000. An Incentive Approach to Identifying Financial System Vulnerabilities. Working Paper WP/00/211. International Monetary Fund. This paper argues that any analysis seeking to identify potential vulnerabilities or instabilities in a financial system should explicitly account for that system’s underlying incentive structure. Researchers have shown that three key structural and policy elements shape the incentives faced by the main agents in any financial system: the market structure within which the system operates, the existence of government safety nets, and the legal and regulatory frameworks. These factors influence agents’ propensities to take risks and determine the inclinations of regulators, supervisors, and markets to monitor risk-taking. The paper outlines an approach for assessing the incentive structure in relation to risk-taking behavior that might threaten the financial system. Cull, Robert, Lemma W. Senbet, and Marco Sorge. 2001. Deposit Insurance and Financial Development. Policy Research Working Paper no. 2682. The World Bank. National governments operate formal deposit insurance systems in order to stabilize their financial and payment systems. However, some economists have argued that deposit insurance can be socially counterproductive if the system is not appropriately structured and supported by adequate regulatory environments. In this paper, the authors examine the long-term effects of deposit insurance on financial development and stability (broadly defined to include the level of financial activity, the stability of the banking sector, and real-sector economic performance) in a sample of 58 countries. Overall, the paper’s findings are consistent with the accepted thinking that deposit insurance schemes accompanied by sound regulatory environments have a positive effect on financial development and economic growth. However, the evidence also indicates that in countries lacking a sound regulatory environment (proxied by quality indices of the rule of law), the presence of a deposit insurance system could contribute to financial instability. Demirgüç-Kunt, Asli, and Enrica Detragiache. 2001. Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation. Policy Research Working Paper no. 2247. The World Bank. This study analyzes panel data for 61 countries during 1980-97 and concludes that explicit deposit insurance tends to be detrimental to bank stability, the more so where bank interest rates are deregulated and the institutional environment is weak. Also, the adverse impact of deposit insurance on bank stability tends to be stronger when the coverage offered to depositors is extensive, when the scheme is funded, and when it is run by the government rather than by the private sector. (© 2001 EconLit) Economides, Nicholas, R. Glenn Hubbard, and Darius Palia. 1999. Federal Deposit Insurance: Economic Efficiency or Politics? Regulation 22, no. 3:15–17. This article argues that the adoption of the federal deposit insurance system in the United States can be attributed more to political power than economic necessity. Although deposit insurance was proposed ostensibly to protect depositors against future bank failures, it would also safeguard the interests of small banks. At the same time that large, well-capitalized banks were supporting the less-restrictive branching legislation, small banks were lobbying both to maintain strict branching regulations, which would prevent competition from larger banks, and to create a deposit insurance fund, which would enable smaller banks to attract consumers while holding less capital. In the end, a concerted political campaign by small banks and their representatives was able to overcome the opposition of larger banks and deposit insurance legislation was enacted. Kelly, William A., and Judith F. Karofsky. 1999. Federal Credit Unions without Federal Share Insurance: Implications for the Future. Paper no. 1752-46. Filene Research Institute. This study compares the performance of uninsured credit unions with that of uninsured banks. Results show that federal share insurance has not bestowed sizable benefits on member institutions and that uninsured credit unions behave more conservatively towards risk-taking than uninsured banks. The authors suggest that uninsured accounts should therefore be permitted at credit unions, although they also urge that more research be done regarding the implementation of such a policy. Kroszner, Randall S., and Philip E. Strahan. 2000. Obstacles to Optimal Policy: The Interplay of Politics and Economics in Shaping Bank Supervision and Regulation Reforms. Working Paper no. W7582. National Bureau of Economic Research. This paper provides a positive political economy analysis of the most important revision of the U.S. supervision and regulation system during the last two decades, the 1991 Federal Deposit Insurance Corporation Improvement Act (FDICIA). The authors analyze the impact of private interest groups as well as political-institutional factors on the voting patterns on amendments related to FDICIA and its final passage to assess the empirical importance of different types of obstacles to welfare-enhancing reforms. Rivalry of interests within the industry (large versus small banks) and between industries (banks versus insurance) as well as measures of legislator ideology and partisanship play important roles and, hence, should be taken into account in order to implement successful change. A "divide and conquer" strategy with respect to the private interests appears to be effective in bringing about legislative reform. The concluding section draws tentative lessons from the political economy approaches about how to increase the likelihood of welfare-enhancing regulatory change. (© 2002 EconLit) Madies, Philippe. 2003. Fondements des systèmes de garantie des dépôts professionnels et volontaires La garantie des dépôts comme un “bien club” (Foundations of Professional and Voluntary Deposit-Guarantee Schemes: The Deposit Guarantee as a Club Good). Revue d’Economie Politique 112, no. 3:387–407. In French without English summary. Oda, Nobuyuki, and Tokiko Shimizu. 2000. Prospects for Prudential Policy: Toward Achieving an Efficient and Stable Banking System. Bank of Japan Monetary and Economic Studies 18, no. 1:119–36. This paper discusses the role of public intervention in the banking market, emphasizing that although market mechanisms can be effective in achieving efficient banking markets, government intervention and prudential policy can be justified when there are notable market failures. Specific market failures in banking include asymmetries in the type and quantity of information available to banks and creditors, and negative externalities associated with bank failures. The authors provide a conceptual summary of the ways in which bank regulatory systems can address these market problems and ensure banking efficiency and stability. They recommend that the deposit insurer charge a variable premium and have the authority to take prompt corrective action against undercapitalized institutions. Separately, the central bank acts as a lender of last resort. In addition, the authors believe that a payments system should be devised to force risk takers to internalize the costs of their behaviors. Stojanovic, Dusan, Mark D. Vaughan, and Timothy J. Yeager. 2000. Is Federal Home Loan Bank Funding a Risky Business for the FDIC? Federal Reserve Bank of St. Louis The Regional Economist (October): 4–9. This paper discusses the recent growth of the Federal Home Loan Bank (FHLB) System, which was established in1932 to address a perceived deficit in the nation’s capital market by making collateralized loans to thrift institutions. The scope of the FHLB System has expanded considerably; the system now offers thrifts, commercial banks, and credit unions a wide range of products and services to help them fund mortgage loans, manage interest-rate risk, and otherwise meet the challenges of a competitive banking market. Between 1992 and 1999 the FHLB’s assets, membership, and outstanding advances increased dramatically. FHLB advances may prove costly for the FDIC, however, because they allow banks to take more risks, weakening the deposit insurer’s position in failure resolutions. Villanueva, Delano. 1999. Early Warning Indicators, Deposit Insurance and Methods for Resolving Failed Financial Institutions: Selected Papers of the SEACEN Workshop on a Regulator’s Action Plan on Bank Failures. Southeast Asian Central Banks (SEACEN). Kuala Lumpur: SEACEN Centre. This volume collects the lecture and teaching materials presented at the March 1998 SEACEN workshop, “A Regulator’s Action Plan on Bank Failures.” The materials cover various aspects of financial crisis management. Topics include early-warning indicators, deposit insurance as a mode of depositor protection, the resolution process, purchase-and­assumption transactions, deposit payoffs, open- bank assistance transactions, other resolution alternatives, the FDIC’s role as receiver, and other significant issues. 2. Designing and Establishing Deposit Insurance Systems Entries in this section discuss international experiences with deposit insurance, various surveys of international deposit insurance systems and structures, lessons learned, emerging best practices, and prescriptions for designing effective and efficient deposit insurance systems. Alsalem, Ahmed Mohammed. 2000. An Evaluation of the IMF Best-Practice Deposit Insurance System: Lessons from the United States Experience. Ph.D. diss., Colorado State University. It is generally agreed that a well-designed deposit insurance system should advance the vitality and stability of the banking sector while minimizing the informational asymmetries that are often associated with insurance programs: moral hazard, adverse selection, and agency problems. To this end, researchers have sought to create models that guide the development of effective deposit insurance systems by identifying specific best practices. One such model, proposed by Gillian Garcia, was adopted by IMF authorities for use by countries that are considering the establishment of a deposit insurance system. The author argues, however, that the Garcia-IMF model is flawed because it is based only on the lessons from the post-1991 period in the United States and recent experiences in other countries. It omits the long and rich pre-1991 experiences of the Federal Deposit Insurance Corporation (FDIC), the individual U.S. states, the failed Federal Savings and Loan Insurance Corporation (FSLIC), and The National Credit Union Share Insurance Fund (NCUSIF). The author makes use of this richer history to identify and incorporate additional institutional features that have proven successful in the past. He then shows that his modified Garcia-IMF model better addresses the fundemental problems of operating a deposit insurance system. Beck, Thorsten. 2001. Deposit Insurance as Private Club: : Is Germany a Model? Policy Research Working Paper no. 2559. The World Bank. The 1980s and 1990s have seen a marked increase in the number of countries that use explicit deposit insurance schemes as part of their government-provided financial safety net. Yet the benefits of having an explicit public system are not universally accepted. Indeed, a number of alternative deposit insurance systems—ones where the government’s guarantee is less explicit or denied entirely—have existed for some time and have been quite successful. This paper describes and evaluates the deposit insurance scheme set up by private commercial banks in Germany in 1975. In contrast to many deposit insurance schemes, the German deposit insurance system is completely private, has no government supervision, and relies on peer monitoring by its member banks. The author evaluates the unique characteristics of the German scheme and the financial environment in which it operates to determine the extent to which it can serve as a model for other countries. He concludes that the German model might be applicable to developing countries that are characterized by concentrated banking sectors, provided there exists an institutional environment that fosters contract enforcement and exhibits a minimum level of corruption. Beck, Thorsten. 2002. Deposit Insurance as a Private Club: Is Germany a Model? Quarterly Review of Economics and Finance 42, no. 4:701–19. This paper describes and evaluates the deposit insurance scheme set up by private commercial banks in Germany in 1975. Unlike schemes in most countries, its funding and management is completely private. While other schemes rely on monitoring by depositors to decrease moral hazard, the German scheme relies on peer monitoring by its member banks. This paper evaluates the German deposit insurance scheme against the background of its unique characteristics—a very concentrated private banking market, a strong institutional environment, and an antibankruptcy bias in Germany—and determines to what extent it serves as a model for other countries. (© North-Holland / 2002 Board of Trustees of the University of Illinois) Beck, Thorsten. 2003. The Incentive-Compatible Design of Deposit Insurance and Bank Failure Resolution: Concepts and Country Studies. Policy Research Working Paper 3043. World Bank. (Also published as chapter 4 in D. G. Mayes and A. Liuksila. 2004. Who Pays for Bank Insolvency? Palgrave Macmillan.) Deposit insurance and bank failure resolution policies are important parts of the financial safety net, and an incentive-compatible design of both can minimize the probability and cost of financial fragility. This paper discusses an incentive-compatible design of deposit insurance, bank failure resolution, and their potential interactions. It also presents and compares the financial safety-net arrangements in three countries: Germany, Brazil, and Russia. From this analysis, the author draws the following lessons: (1) embedding the financial safety net and its different components within the banking community can reduce principal–agent problems by making the banks the managers and owners of the safety net; (2) assessing risk-based premiums based on auditing by the deposit insurer itself helps align incentives of banks and the deposit insurer and thus minimizes moral-hazard risk; (3) a private–public partnership that relies on a completely industry-based solution for nonsystemic crises can reduce risks to the financial safety net. Brownbridge, Martin, and Samuel Munzele Maimbo. 2003. Can Prompt Corrective Action Rules Work in the Developing World? Journal of African Business 4, no, 2:47–68. Experience has shown that one major weakness of existent banking regulation is “regulatory forbearance”—that is, the failure of bank regulators to enforce regulations properly and to intervene promptly when banks become distressed. One method of constraining regulatory forbearance has been the implementation of rules that automatically trigger regulatory action, such as the prompt corrective action (PCA) rules adopted in the United States in 1991. This paper examines the potential benefits and the feasibility of incorporating PCA-type rules into banking regulations in developing countries. The paper concludes that such rules can improve bank regulation in developing countries if the rules are part of a more comprehensive set of institutional reforms that strengthen the operational independence of the bank regulators, improve their on-site examination authority, and strengthen accounting standards. Canada Deposit Insurance Corporation (CDIC). 2001. International Conference on Deposit Insurance: Guidance and Future Directions. Conference Proceedings. The first day of the CDIC international conference focused on guidance for countries developing deposit insurance systems and on emerging issues and future challenges for deposit insurers. The second day focused on technical presentations that covered issues such as premium and funding options, self-assessment methodologies, liquidation and failure-resolution options, and research priorities for deposit insurers. The final day of the conference was devoted to a discussion of the latest draft of the Basel II Capital Accord. Coburn, Jane F., and John P. O’Keefe. 2003. Risk Assessment: Results of an International Survey of Deposit Insurers. FDIC Banking Review 15, no. 1:17–35. In 2000, the FDIC conducted a survey of foreign deposit insurance organizations to ascertain their methods of risk assessment and asset liquidation, the role of their receiver, and their policies on funds availability. This article analyzes the responses from 37 insurers located in 34 countries. The article is the second in a three-part series on the survey results. The first part described failure-resolution methods, asset-liquidation practices, and the role of the receiver. This installment focuses on the risk-assessment practices of the insurers. The results of the survey highlight both operational similarities and operational differences between foreign deposit insurance organizations and the FDIC. Demirgüç-Kunt, Asli, and Enrica Detragiache. 2002. Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation. Journal of Monetary Economics 49, no. 7:1373– 1406. Based on evidence for 61 countries in 1980–1997, this study finds that explicit deposit insurance tends to increase the likelihood of banking crises, the more so where bank interest rates are deregulated and the institutional environment is weak. Also, the adverse impact of deposit insurance on bank stability tends to be stronger the more extensive is the coverage offered to depositors, where the scheme is funded, and where it is run by the government rather than the private sector. (© 2003 Elsevier Science B.V.) Demirgüç-Kunt, Asli, and Edward J. Kane. 2001. Deposit Insurance around the Globe: Where Does It Work? Policy Research Working Paper no. 2679. The World Bank. In the late 1990s, several financial and banking crises occurred around the globe. As a result, a growing number of developing countries have been seeking advice about designing and adopting an explicit deposit insurance system. Previous research has delineated not only the well-known trade-off between banking stability and moral hazard but also the interaction between deposit insurance design features and country-specific elements of a country’s financial and governmental contracting environment. This paper documents the extent of cross-country differences in deposit insurance design and reviews the empirical evidence on how particular design features affect private market discipline, banking stability, financial development, and the effectiveness of crisis resolution. The authors’sauthor’s findings suggest that countries with institutionally weak informational, legal, and supervisory environments should refrain from adopting an explicit deposit insurance system until they assess and remedy any weaknesses in their environments. Demirgüç-Kunt, Asli, and Edward J. Kane. 2002. Deposit Insurance around the Globe: Where Does It Work? Journal of Economic Perspectives 16, no. 2:175–95. Many nations around the world have established (or are considering establishing) a deposit insurance system to help prevent costly and disruptive bank runs. However, little empirical evidence exists about the desirability and operational effectiveness of deposit insurance systems. How, for example, does deposit insurance affect bank stability? What role does deposit insurance play in the management of crises? How does it affect market discipline or financial system development? In this paper, the authors attempt to answer these questions by reviewing empirical evidence on deposit insurance and bank regulation from over 70 countries. Given their findings, the authors conclude that deposit insurance is not always good or always bad. It can be a useful part of a country’s financial safety net. However, in institutionally weak environments, designing a deposit insurance scheme that will not increase the probability and depth of future banking crises is hard to do. Demirgüç-Kunt, Asli, and Edward J. Kane. 2002. Cross-Country Evidence on Deposit Insurance. Quarterly Review of Economics and Finance 42, no. 2:695–99. The papers included in this special issue of the Quarterly Review of Economics and Finance are part of a research effort at the World Bank to understand the effects of explicit deposit insurance on economic outcomes and to investigate the institutional prerequisites for successful adoption of explicit deposit insurance. This paper synthesizes the papers included in the special issue. Demirgüç-Kunt, Asli, and Tolga Sobaci. 2001. Deposit Insurance around the World. The World Bank Economic Review 15, no. 3:481–90. In the past two decades, in a series of banking crises around the world, banks have become systematically insolvent. These crises have occurred in developed and developing economies alike. To make such financial system breakdowns less likely and to limit their costs if they occur, policymakers feel the need for financial safety nets. These include such policies as implicit or explicit deposit insurance, a lender of last resort function of the central bank, bank insolvency resolution procedures, and bank regulation and supervision. Of these policies, explicit deposit insurance has been gaining popularity in recent years. Since the 1980s the number of countries with explicit deposit insurance schemes almost tripled, with most OECD countries and an increasing number of developing economies adopting some form of explicit depositor protection. In 1994 deposit insurance became the standard for the newly created single banking market of the European Union. Establishing an explicit deposit insurance scheme became part of the generally accepted best practice advice given to developing economies. (© 2001 EconLit) Drehmann, Mathias. 2002. Will an Optimal Deposit Insurance Always Increase Financial Stability? Bonn Economic Discussion Papers, no. 2002-28. Graduate School of Economics, University of Bonn. This paper presents a theoretical model showing that deposit insurance can increase the probability of systemic banking crises, even if the deposit insurance is optimally designed and premiums are risk related. This result is driven by the possibility of contagious bank runs. In the model, the potential for contagious bank runs (and the costs associated with them) acts as a disciplinary device that prevents banks from investing in highly correlated portfolios. This disciplinary effect is eliminated, however, by deposit insurance. In the presence of deposit insurance, bank portfolios can become so highly correlated that the probability of a systemic banking crisis increases. Evanoff, Douglas D. 2001. Designing an Effective Deposit Insurance Structure: An International Perspective. The Federal Reserve Bank of Chicago. Chicago Fed Letter, no. 167c. In December 2000, the Federal Reserve Bank of Chicago and the Financial Stability Forum (an international regulatory and monetary authority created by the Group of 7 industrialized nations in 1998 to study ways of managing risk in the global financial system) cosponsored a symposium on designing effective deposit insurance systems. Based on the Financial Stability Forum’s recommendations to countries that were considering introducing or modifying deposit insurance schemes, the symposium was intended to generate informed feedback from leading financial and banking economists. This Letter summarizes the discussion at the symposium and the conclusions that emerged. Financial Stability Forum. 2000. Working Group on Deposit Insurance: A Consultative Process and Background Paper. (June). The Financial Stability Forum commissioned a Study Group in 1997 to analyze the feasibility of setting out international guidance regarding deposit insurance arrangements. The Study Group’s report concluded that international guidelines would be an invaluable resource to countries looking to adopt or reform a deposit insurance system. Accordingly, the Working Group on Deposit Insurance was commissioned. This pamphlet outlines the issues on which the Working Group will focus in developing deposit insurance guidelines. As part of its charge, the Working Group will assess the conditions necessary to establish an effective system, delineate key attributes of the ideal system, and address issues related to making the transition from blanket guarantees to a limited-coverage insurance system. Financial Stability Forum and Federal Reserve Bank of Chicago. 2000. Designing an Effective Deposit Insurance Structure: An International Perspective. Conference Proceedings. December 12, 2000. This conference held at the Federal Reserve Bank of Chicago, served as a forum for academics, regulators, and industry practitioners to discuss ways to improve deposit insurance system design and reform. The Financial Stability Forum’s Working Group on Deposit Insurance presented four draft issue papers covering public-policy objectives, methods of analyzing a nation’s preparedness for deposit insurance, ways to limit moral hazard, and issues encountered when deposit insurance is altered to provide limited coverage rather than blanket guarantees. The discussants offered serveral suggestions for improving the papers, pointing out the need to determine when implicit insurance might be preferable to explicit insurance, the need to present definitive guidance rather than a vague list of alternatives from which countries can choose when implementing a deposit insurance scheme, and the important role of market discipline in a country’s regulatory scheme. Fondo Interbancario di Tutela dei Depositi (FITD). 2001. Report on Deposit Insurance: An International Outlook. Rome: : FITD. This report focuses on updated data on deposit insurance systems already in place and describes innovations that have been introduced that may be of use to countries developing their own deposit insurance systems. Section one of the report presents the results of an FITD survey of the institutional characteristics of deposit insurance schemes in 30 countries. The survey results show that though there are some similarities, there are still many institutional and operational differences among deposit insurers around the globe. Section two of the report is a speech by Philadelphia Federal Reserve Bank President Anthony M. Santomero on how deposit insurance in the United States has evolved and how it currently works. Garcia, Gillian. G. 2000. Deposit Insurance and Crisis Management. Working Paper no. WP/00/57. International Monetary Fund. A well-designed deposit insurance system (DIS) will provide incentives for citizens to keep the financial system sound. However, a poorly designed DIS can foster a financial crisis. This paper, therefore, makes recommendations for creating and running a limited, incentive-compatible DIS. The paper also examines factors in the decision to grant, temporarily, a comprehensive guarantee, and the design of that guarantee, should a systemic financial crisis nevertheless occur. It concludes with guidance on the removal of that guarantee. (© 2002 EconLit) Hartley, James E. 2001. Mutual Deposit Insurance. The Independent Review 6, no. 2:235–52. Should government bank deposit insurance be scrapped in favor of a system of bank cross-guarantees? Some proponents claim to have found successful cross-guarantees among the banks of antebellum Indiana, Ohio, and Iowa, but a closer examination suggests otherwise. (© 2001 EconLit) Hermes, Niels, and Robert Lensink. 2000. Financial System Development in Transition Economies. Journal of Banking and Finance 24, no. 4:507–24. This paper provides an overview of the major issues with respect to financial system development in transition economies, which were discussed at a conference in Groningen, the Netherlands, December 1997. After a brief remark on the role of financial system design during economic transition, the paper focuses on the role of stock markets in the process of financial intermediation with emphasis on the role of regulations in these markets, the role of deposit insurance to improve bank system stability, and the importance of an independent central bank, measurement issues relating to central bank independence and its impact on inflation and growth. (© 2002 EconLit) Iwanicz-Drozdowska, M. 2002. Kryzysy Bankowe. Przyczyny I rozwiazania. (Banking Crisis. Causes and Solutions). Polish Economic Publishers. [In Polish with English summary.] This book compiles case studies on banking crises occurring within the last 20 years in 22 countries around the world. Each case study includes information on the economic environment of the particular country, the country’s regulatory environment and financial policies, the reaction of government and supervisory agencies to financial crises, and moral-hazard issues Kane, Edward J. 2003. What Kind of Multinational Deposit-Insurance Arrangements Might Best Enhance World Welfare? Pacific-Basin Finance Journal 11, no. 4: 413–28. This paper analyzes the problems with the International Association of Deposit Insurers (IADI). The author thinks that because of cultural differences among regulators, the IADI cannot effectively consolidate deposit insurers. He finds that the IADI could be more successful in its mission of preventing cross-country spillovers of crisis pressure and improving the exchange of regulatory information if it organized a public market in deposit-reinsurance derivatives. Such a market would ultimately give signals about which insurance structures were optimal. Thus, individual countries would have an incentive to improve their own deposit insurance structure frequently, not only during a financial crisis. Kaufman, George G., and Steven A. Seelig. 2001. Post-Resolution Treatment of Depositors at Failed Banks: Implications for the Severity of Banking Crises, Systemic Risk, and Too-Big-to-Fail. IMF Working Paper no. WP/01/83. International Monetary Fund. Losses may accrue to depositors at insolvent banks both at and after the time of official resolution. Losses at resolution occur because of poor closure rules and regulatory forbearance. Losses after resolution occur if depositors are denied access to their funds— even temporarily. This paper examines both the sources and the implications of potential depositor losses in bank resolutions—, in particular, depositor losses due to delays in the payment of legitimate depositor claims. The paper also reports on a special survey of access practices in deposit insurance schemes around the world and contrasts those with the policy of immediate access currently followed by the FDIC in the United States. The paper concludes with “best- practices” recommendations regarding depositors’sdepositor’s access to their funds at resolved institutions. Lee, Wai Sing, and Chuck C. Y. Kwok. 2000. Domestic and International Practice of Deposit Insurance: A Survey. Journal of Multinational Financial Management 10, no. 1:29–62. The literature on deposit insurance tends to be mostly confined to a discussion of the reform proposals and risk-related premium assessment methodologies. The theoretical explanation of the alternatives to the major components of a deposit insurance scheme is sketchy. Comparisons on the international practice of deposit insurance are not extensive and comprehensive enough. To fill the gaps in the literature, this paper examines the theoretical foundations of the key issues of a deposit insurance scheme, provides a critical comparison on the international practice of deposit insurance, and makes suggestions on how a complete deposit insurance scheme can be properly designed and implemented. (© 2002 EconLit) Vaez-Zadeh, Reza, Xie Danyang, and Edda Zoli. 2002. MODIS: A Market-Oriented Deposit Insurance Scheme. Working Paper 02/207. International Monetary Fund. This paper outlines the features of a market-oriented deposit insurance scheme (MODIS). Among the main features of the MODIS described here are that banks will issue two types of deposits (tier 1 and tier 2). Tier 1 deposits would be covered by the government-run deposit insurance system, while tier 2 deposits would not. Depositors would be able to choose how they would like to allocate their funds between the two types, and there are no upper limits on either type. The authors use a model to determine the optimal level of deposit insurance coverage under MODIS and find that the best insurance coverage is higher in developing countries than in developed countries. 3. Pricing and Valuation of Deposit Insurance Entries in this section deal with methodologies for calculating deposit insurance premiums. In particular, these entries explore option pricing theory and its application to deposit insurance pricing; the effects of fixed and risk-adjusted pricing regimes; estimation of actuarially fair premiums; and the market value of deposit insurance guarantees over time. Colantuoni, Joseph A. 2002. Pricing Deposit Insurance as a Contingent Claim. Ph.D. diss., University of Virginia. This paper uses three option pricing techniques to price federal deposit insurance for a large sample of banks. Because the historical flat-rate premium system and risk-related premium matrix used by the FDIC are unable to differentiate risk among banks, deposit insurance is modeled here as a European put option. Estimates of individual bank insurance premiums are generated for both public and private banks, and each model is evaluated on how it prices risk across institutions, indicates bank failure, and covers the cost of bank failure; each model is also evaluated on how its premium estimates compare with historical assessment rates. While the contingent claim models presented in this paper effectively separate strong banks from weaker ones, the models’ premium estimates are highly sensitive to minor variations in reported financial data. Dermine, Jean, and Fatma Lajeri. 2001. Credit Risk and the Deposit Insurance Premium: A Note. Journal of Economics and Business 53, no. 5:497–508. Previous research on market-based evaluation of deposit insurance premia has modeled the bank as a corporate firm with risky assets and insured liabilities. No attempt was made to analyze explicitly the risk characteristics of bank assets. The purpose of this note is to model bank lending explicitly and calculate loan-risk sensitive insurance premia. The lending function of banks creates the need to model equity as a "capped" call option. A simulation exercise shows that market-based estimates of deposit insurance premia which ignore the cap lead to significant underestimation. (© 2001 EconLit) Duan, Jin-Chuan, and Jean-Guy Simonato. 2002. Maximum Likelihood Estimation of Deposit Insurance Value with Interest Rate Risk. Journal of Empirical Finance 9, no.1:109–32. This paper develops a maximum likelihood estimation method for the deposit insurance pricing model of Duan, Moreau, and Sealey (1995). A sample of 10 U.S. banks is used to illustrate the estimation method. The results are then compared to those obtained with the modified Ronn-Verma method used in Duan, Moreau, and Sealey (1995). The authors’ findings reveal that the maximum likelihood method yields estimates for the deposit insurance value larger than the ones based on the modified Ronn-Verma method. The authors conduct a Monte Carlo study to ascertain the performance of the maximum likelihood estimation method. The simulation results are clearly in favor of their proposed method. (© Elsevier Science B.V.) Duffie, Darrell, Robert Jarrow, Amiyatosh Purnanandam, and Wie Yang. 2003. Market Pricing of Deposit Insurance. Journal of Financial Services Research 24 no. 2–3:93–119. This paper presents an approach to the market valuation of deposit insurance that is based on reduced-form methods for the pricing of fixed-income securities under default risk. By reference to bank debt prices as well as qualitative-response models of the probability of bank failure, the authors suggest how a risk-neutral valuation model for deposit insurance can be applied both to the calculation of fair-market deposit insurance premia and to the valuation of long-term claims against the insurer. (© 2003 Kluwer Academic Publishers) Eisenbeis, Robert A., and Larry D. Wall. 2002. The Major Supervisory Initiatives post- FDICIA: Are They Based on the Goals of PCA? Should They Be? Working Paper 2002-31. Federal Reserve Bank of Atlanta. In 2001, the FDIC made a number of proposals to reform the existing deposit insurance system. In this paper, the authors question whether these reform proposals are leading in the right direction. That is, are the current initiatives consistent with the goals of FDICIA? According to the authors, the evidence suggests that most supervisory efforts have been directed toward minimizing the probability of failure rather than minimizing the expected losses due to failure. Minimizing expected losses, the authors argue, is where the emphasis should lie. Falkenheim, Michael, and George Pennacchi. 2003. The Cost of Deposit Insurance for Privately Held Banks: A Market Comparative Approach. Journal of Financial Services Research 24, no. 1–2:121–48. Previous empirical studies that use an option pricing model to estimate deposit insurance costs have been limited to banks that issue publicly traded securities: a bank’s security prices are used to infer its risk characteristics. However, if deposit insurance costs are needed for privately held banks, as would be the case under a system of risk-based insurance premiums, then an alternative method is required. This paper presents a “market comparable” approach for valuing private banks’ deposit insurance. The approach first uses information on public depository institutions to identify the statistical relationships to predict the risk characteristics of a private depository institution based on its supervisory accounting data. This approach is applied to over 7000 private banks and thrifts to estimate their risk characteristics and their implied risk-neutral and physical probabilities of insolvency. For the vast majority of institutions, these risk characteristics and insolvency probabilities are within a reasonable range. (© Kluwer Academic Publishers) Laeven, Luc. 2002. International Evidence on the Value of Deposit Insurance. Quarterly Review of Economic and Finance 24, no. 4: 721–32. The goal of this paper is to improve our understanding of the costs and benefits of explicit deposit insurance. To this end, the author compares the opportunity-cost value of deposit insurance services for a large sample of banks drawn from countries with or without explicit deposit insurance. After correcting for certain bank- and country-specific factors, the paper finds that the existence of explicit deposit insurance raises the opportunity-cost value of deposit insurance, but that the presence of a sound legal system with proper enforcement of rules reduces the adverse effects of explicit deposit insurance on the opportunity-cost value of deposit insurance services. These findings suggest that moral hazard and other incentive problems created by existing governmental deposit insurance schemes differ in magnitude between different types of banks and among different countries, and that explicit deposit insurance should not be introduced in countries with weak institutional environments. (© 2002 Elsevier Science B.V.) Laeven, Luc. 2002. Pricing of Deposit Insurance. Policy Research Paper no. 2871. World Bank. The purpose of this paper is to provide guidelines for the pricing of deposit insurance in different countries. More specifically, the goals of the paper are twofold: (1) to present several methodologies that can serve as benchmarks for the pricing level of deposit insurance, and (2) to quantify how specific design features affect the price of deposit insurance. Among the paper’s findings is that risk diversification and risk differentiation within a deposit insurance system can reduce the price of deposit insurance. More importantly, the paper finds that the actual premiums paid in many countries are lower than the premiums implied by the theoretical model. Consequently, the author argues, deposit insurance is underpriced in many countries around the world. Morel, Christophe, and Jean-Louis Nakamura. 2000. Fonctions et tarification d'un fonds de garantie bancaire (functions and pricing of deposit insurance). Revue française d'economie 15, no. 2:77–116. The purpose of this research is two-fold. Firstly, it presents the economic justifications for deposit insurance schemes as well as the features of such schemes identified as "optimal" in the literature in order to avoid moral hazard and adverse selection phenomena. Thus, according to the literature, deposit insurance should be limited, compulsory, universal and the fees paid by the banks should directly depend on each bank's risk level. Secondly, it tests two alternative ways of calculation for the fees paid by the banks to the deposit insurance. The first method consists in drawing a comparison between the insurance fee and a put option, whose price may be calculated from each bank's investment risk. The second proposal relies on a model of banking behavior which determines a "socially optimal" insurance fee. Such a fee should indeed maximise the banks' profits when no bank fails and depositors' indemnities when the bank is going bankrupt. (© 2002 EconLit) Niinimaki, Juha-Pekka. 2003. Fairly Priced Deposit Insurance under Adverse Selection. Finnish Economic Papers 16, no. 1:38–48. This paper studies the connection between standard insurance theory and deposit insurance. The author extends the Rothschild and Stiglitz model of insurance to deposit insurance. He explains that high-risk banks should receive full coverage and low-risk banks should have only partial coverage. If interest rates can be regulated, low-risk banks can also receive full coverage. The paper uses a price-coverage method of screening, and a model in which both the banker and some depositors know the bank’s risk. The author finds that the best solution may be to divide deposits into junior and senior deposits. Pennacchi, George G. 2001. Estimating Fair Deposit Insurance Premiums for a Sample of Banks under a New Long-Term Insurance Pricing Methodology. In The Financial Safety Net: Costs, Benefits, and Implications for Regulation, Proceedings of the 37th Annual Conference on Bank Structure and Competition, 756–76. Federal Reserve Bank of Chicago. A number of theoretical and empirical studies have applied option pricing methods to value deposit insurance premiums. However, the research is based on models that typically specify a single maturity date for the deposit insurance contract. This paper presents a model for valuing deposit insurance wherein insurance rates are set according to a moving average of the value of the FDIC’s exposure to future losses. That is, the methodology involves treating the insurance guarantee as a moving average of several long-term contracts going forward. In addition to calculating fair premiums, the paper also calculates what is referred to as “expected- value” premiums under this overlapping contract or moving-average approach. Expected- value premiums differ from fair- value premiums in that they do not provide compensation for the insurer’s exposure to systemic risk. The author holds that this approach results in less volatile insurance premiums and avoids providing banks with a deposit insurance subsidy. However, this stability comes at a price: higher fair- value premiums are needed to compensate taxpayers for their exposure to systemic risk. Shibut, Lynn. 2002. Should Bank Liability Structure Influence Deposit Insurance Pricing? Working Paper 2002-01. Federal Deposit Insurance Corporation. In this paper, the author discusses the influence of the banking industry’s liability structure on the FDIC’s risk exposure, the relationship between this exposure and the assessment base, and various ways in which the FDIC could incorporate the effects of bank liability structure into its price for deposit insurance. For most of the industry, she finds that the FDIC’s risk exposure increases when banks move from domestic deposits to other funding sources because decreases in assessment income associated with a smaller assessment base are not offset by reductions in the FDIC’s exposure to loss. Because of the benefits of market discipline, however, this result may not hold for banks that rely heavily on unsecured credits. The author outlines three ways to incorporate bank liability structure into the FDIC’s pricing policy for deposit insurance: (1) change the assessment base, (2) adjust the pricing matrix, and (3) price directly for risk. She concludes that no such changes should be made in isolation. In particular, issues related to bank size must also be addressed because any change associated with liability structure would effectively shift the assessment burden toward larger banks. 4. Regulation and Supervision of Insured Depository Institutions The entries in this section deal with the regulation and supervision of insured depository institutions: the appropriate role for bank regulation, alternative regulatory structures, principles of effective regulation, regulatory forbearance and its effect on the cost of bank failures, bank capital regulations, the economic effect of bank regulation, and deregulation. American Enterprise Institute (AEI). 2000. Reforming Bank Capital Regulation: A Proposal by the U.S. Shadow Financial Regulatory Committee. Policy Statement no. 160. AEI Press. This statement by the Shadow Financial Regulatory Committee (SFRC) responds to the Basel Committee’s 1999 proposal to reform international bank capital standards. The SFRC agrees with the Basel Committee’s objective of relying more heavily on market-based risk assessments to determine bank capital standards but believes that the specific proposals under consideration may actually distort the relationship between capital requirements and risk. The SFRC recommends that the current risk-based requirements be replaced by a minimum leverage requirement. The group further recommends that banks be forced to meet these new capital requirements by issuing new subordinated debt; this would align market forces more directly with bank risk measures and would reward or penalize proper or inadequate bank risk management. The SFRC would not, however, reduce the role of bank supervisors and regulators but, instead, would supplement regulation with market discipline. Association d’économie financière. 2000. La Revue d’économie financière, no. 60. [Published in English.] This issue of the Revue d’économie financière focuses exclusively on issues relating to financial security and regulation. The pieces cover five themes: changes in the principles of prudential control, the legal aspects of prudential control, the organization of prudential supervision, supervisory problems posed by particular financial players, and the question of deposit insurance. The articles specifically related to deposit insurance are “The French System of Deposit Insurance,” by Charles Cornut; “An Overview of France’s New Deposit Insurance System,” by Sylvie Matherat and Vitchett Oung; and “Deposit Insurance as a Tool for Banking Supervision,” by Christophe Morel. Each of these is abstracted separately. Barth, James R., Gerald Caprio, Jr., and Ross Levine. 2001. Bank Regulation and Supervision: What Works Best? Policy Research Working Paper no. 2725. The World Bank. This article draws on a unique World Bank database on bank regulation and supervision in 107 countries to examine the relationship between regulation/supervision on the one hand, and bank performance and financial system stability on the other hand. More specifically, the authors assess the effect of a number of regulatory and supervisory practices, including the regulation of bank capital, permissible bank activities, information disclosure, ownership, the features of deposit insurance schemes, supervisory power, and level of enforcement. The analysis raises cautionary flags about strategies that rely excessively on direct government oversight and restrictions on bank activities. Rather, the regulatory strategies that best promote sector performance and stability are found to be those that empower the private sector and limit the adverse effects of overly generous deposit insurance schemes. Barth, James R., Gerald Caprio, Jr., and Ross Levine. 2001. The Regulation and Supervision of Banks around the World. Policy Research Working Paper no. 2588. The World Bank. This paper presents and discusses a new database on the regulation and supervision of commercial banks in 107 countries; included in the database is information on deposit insurance schemes. The data are drawn from a 1998–99 survey of national supervisory and regulatory agencies and covers entry and capital requirements, activity and ownership restrictions, auditing and disclosure requirements, loan classifications and provisioning regulations, troubled-bank resolution activity, supervisory quality, and a number of characteristics ofabout deposit insurance schemes. In addition to providing a basic description of the data, the paper also presents some descriptive statistics, including alternative groupings and aggregations, as well as some simple correlations among selected variables. The database is available at the World Bank’s Web site for financial sector research (http://worldbank.org/research/interest/intrstweb/htm). Barth, James R., Gerard Caprio, Jr., and Ross Levine. 2002. Bank Regulation and Supervision: What Works Best? Working Paper 9323. National Bureau of Economic Research. Responding to a paucity of evidence on which of the many regulatory and supervisory practices in use around the world work best to promote banking system development and stability, the authors of this paper use information from an international survey to examine the relationship between specific regulatory practices and banking system development, efficiency, and fragility. The data, primarily from 1999, are used to assess which regulations and supervisory practices are associated with greater bank development, performance, and stability. More specifically, the authors examine regulations on permissible bank activities, the mixing of banking and commerce, regulations on domestic and foreign bank entry, capital adequacy, deposit insurance, supervisory power, independence, strictness of enforcement, regulations fostering information disclosure, and government ownership. Broadly, the findings suggest that policies that rely excessively on extensive government oversight of and restrictions on banks may be inferior to regulatory practices that force accurate disclosure, empower private-sector corporate control of banks, and foster incentives for private agents to monitor and exert corporate control. Beck, Thorsten, Asli Demirgüç-Kunt, and Ross Levine. 2003. Bank Supervision and Corporate Finance. Policy Research Working Paper 3042. World Bank. Banks provide a substantial proportion of external finance to corporations around the globe. Yet there have been few studies of whether international differences in bank supervision influence the flow of credit to corporations. This paper begins by examining several competing theories about how bank supervisory practices facilitate or retard the flow of credit. It then uses firm-level data on almost 5,000 firms across 49 countries to examine the effect of bank supervision on the accessibility of external capital for private firms. One of the authors’ findings is that in countries where strong official supervisory agencies directly monitor banks, firms tend to face greater financing obstacles. However, greater independence of the supervisory agency tends to mitigate the adverse consequences of powerful supervision. Another of the authors’ findings is that when bank supervisory agencies both force banks to disclose accurate information and enhance private monitoring, the financing difficulties faced by firms tend to be eased. Benston, George J. 2000. Is Government Regulation of Banks Necessary? Journal of Financial Services Reaserch 18, no. 2–3:185–202. Banks have been involved with and regulated by governments for hundreds of years. Following a brief review of this history, the author delineates nine reasons that could justify continued regulation, particularly in the United States. These include deposit insurance, preventing banks from obtaining excessive economic power, reducing the cost of individual bank insolvency, avoiding the effects of bank failures on the economy, protecting the payments system, serving the interests of popularly elected officials, enhancing the Federal Reserve's control over the money supply, suppressing competition, and protecting consumers. Analysis of each leads the author to conclude that deposit insurance, which allows banks to hold insufficient capital, is the only public-policy­justifiable rationale for regulation. This concern can be managed with capital requirements; otherwise, banks should only be regulated as are other corporations. (©2002 EconLit) Board of Governors of the Federal Rerserve System. 1999. Using Subordinated Debt as an Instrument of Market Discipline. Staff Study no. 172. Board of Governors of the Federal Reserve System. This report presents the results of a Federal Reserve System study of issues pertaining to the use of subordinated notes and debentures (SND) as policy instruments to achieve market discipline. The study examines the motivations for SND policies, given current banking industry conditions; presents a review of relevant literature discussing the extent to which SND policy can influence market discipline; and analyzes the different operational characteristics of an SND policy. Board of Governors of the Federal Reserve System and U.S. Department of the Treasury. 2000. The Feasibility and Desirability of Mandatory Subordinated Debt. Report submitted to the Congress pursuant to section 108 of the Gramm-Leach-Bliley Act of 1999. Board of Governors of the Federal Reserve System. This report assesses whether certain depository institutions and/or depository institution holding companies that are deemed to be systemically important should be required to issue and maintain a minimum amount of subordinated debt. The five primary objectives of a subordinated debt policy would be to improve direct market discipline, improve indirect market discipline, improve transparency and disclosure at depository institutions, increase the size of the financial cushion provided to the federal deposit insurer, and reduce the tendency for depository institution supervisors to forbear resolving a troubled institution. The report concludes that mandated subordinated debt can be expected to encourage market discipline and improve transparency, although it is uncertain whether such a policy would enlarge the deposit insurance financial cushion or dissuade regulators from practicing forbearance. Thus, the Board of Governors of the Federal Reserve System and the Secretary of the Treasury do not support the implementation of a subordinated policy at this time, but they welcome further research into the topic. Broome, Lissa L., and Jerry W. Markham. 2001. Regulation of Bank Financial Service Activities: Cases and Materials. West Group. This book presents a comprehensive overview of banking regulation and law in the United States and is intended for both academics and practitioners. It covers the history of banking regulation as well as federal, state, and international regulatory issues. It has chapters on bank commercial lending; Gramm-Leach-Bliley and its regulatory implications for the securities, derivatives, and insurance operations of banks; the regulation of thrifts and credit unions; trust activities; geographic expansion, mergers, and antitrust; bank liabilities and capital; and supervision, enforcement, and failed-bank resolution. Calomiris, Charles W. 2000. U.S. Bank Deregulation in Historical Perspective. Cambridge University Press. Six previously published papers describe how a combination of momentary political bargaining and long-run path dependence has produced the history of American banking regulation and, more recently, deregulation. Papers consider regulation, industrial structure, and instability in U.S. banking in historical perspective; recent models of the origins of banking panics in light of the available evidence; the origins of federal deposit insurance; American finance and the cost of rejecting universal banking based on a comparison with the German case, 1870–1914; the evolution of market structure, information, and spreads in American investment banking; and change in U.S. corporate banking during the 1980s and 1990s and prospects for the future. (© 2002 EconLit) Chapra, M. Umer, and Tariqullah Jeddah Khan. 2000. Regulation and Supervision of Islamic Banks. Islamic Development Bank, Islamic Research and Training Institute. This paper considers the regulatory standards and supervisory framework needed for Islamic banks and whether existing international standards of best practice are adequate, given the differences from conventional banks arising from the need to comply with the Shari'ah. It provides background on the history, characteristics, and changing environment of Islamic finance. It addresses questions of prudential regulation and supervision, reviewing international standards and covering issues of capital adequacy and the implications of the emerging risk-weighting systems for Islamic banks, alternatives available for Islamic banks, risk management, internal controls and external audit, transparency, deposit insurance, accounting standards, and the possible establishment of an Islamic Financial Services Board and an International Islamic Rating Agency. It discusses some of the crucial fiqhi issues that need to be resolved to facilitate the effective supervision of Islamic banks and accelerate their development. (© 2002 EconLit) Chami, Ralph, Moshin S. Khan, and Sunil Sharma. 2003. Emerging Issues in Bank Regulation. IMF Working Paper WP/03/101. International Monetary Fund. This paper presents an overview of changes in the banking industry brought about by technology and deregulation, and discusses the challenges faced by international regulators in implementing the bank regulatory framework envisioned by the Basel II Accord. According to the authors, finding the right balance among regulation, supervision, and reliance on market discipline is likely to be very difficult, especially in developing countries. Das, Udaibir S., and Marc Quintyn. 2002. Crisis Prevention and Crisis Management: The Role of Regulatory Governance. IMF Working Paper WP/02/163. International Monetary Fund. Regulatory agencies’ adherence to good governance practices is a precondition of instilling good governance practices in the supervised sectors. Here, the authors view one of the defining characteristics of good regulatory governance as the capacity to manage resources efficiently and to formulate, implement, and enforce sound policies and regulations. Regulatory governance is seen to apply to those government agencies or institutions that possess the legal power to regulate, supervise, and intervene in the financial sector (including banking, insurance, securities, and payment systems). This paper explores the quality of regulatory governance by analyzing the results of financial system evaluations conducted under the auspices of the Financial Sector Assessment Programs (FSAP) of the International Monetary Fund and the World Bank. In particular, the authors examine four key components of regulatory governance: regulatory independence, accountability, transparency, and integrity. The analysis covers approximately 46 countries that participated in the FSAP effort between 1999 and 2001. On the basis of their review, the authors conclude that banking supervisors are more independent than supervisors of other sectors, while securities regulators perform better on transparency. Insurance regulators appear to be weak in all the components of regulatory governance. Eisenbeis, Robert A., Frederick T. Furlong, and Simon Kwan, eds. 1999. Financial Modernization and Regulation. Journal of Financial Services Research 16, nos. 2/3. Kluwer Academic. Twelve papers, plus comments, presented at a conference cosponsored by the Federal Reserve Banks of Atlanta and San Francisco in September 1998, identify the reasons for changes in the financial-services sector and the implications for financial supervision and regulation. Papers focus on the relation between interbank transactions and supervisory reform; implications for bank supervision of modernizing financial regulation; theory and evidence regarding the subsidy provided by the federal safety net; the effects of setting deposit insurance premiums to target insurance fund reserves; trends in organizational form and their relationship to performance in the case of foreign securities subsidiaries of U.S. banking organizations; financial regulatory structure and the resolution of conflicting goals; regulatory distortions in a competitive financial-services industry; how offshore financial competition disciplines exit resistance by incentive-conflicted bank regulators; alternative approaches to financial supervision and regulation; financial modernization and regulation in Japan; a perspective on financial regulation from the United Kingdom; and Europe's single banking market. (© 2002 EconLit) Elifoglu, I. Hilmi, and James W. Thompson. 2001. When May Examiners Review External Auditors’ Workpapers? Bank Accounting and Finance 14, no. 2:51–58. This article summarizes the key elements of the Memorandum (Transmittal 00-19), Reviews of External Auditors’ Workpapers, that the FDIC issued on March 21, 2000. The memorandum provides guidance to examiners on situations in which they should review the workpapers prepared by an insured depository institution’s external auditor. Enoch, Charles, David Marston, and Michael Taylor, eds. 2002. Building Stronger Banks through Surveillance and Resolution. International Monetary Fund. The 11 papers collected for this book attempt to set out some common principles of financial-sector surveillance and the resolution of banking-sector problems. The first chapter of the volume examines IMF surveillance and the best-practice standards that serve as a benchmark for judging financial systems. The second part is concerned with banking system “restructuring”—the management and resolution of banking-sector instability. Several papers in the book were subsequently revised and published in the IMF working paper series. Federal Reserve Bank of Chicago. 2000. The Changing Financial Industry Structure and Regulation: Bridging States, Countries, and Industries. Proceedings of the 36th Annual Conference on Bank Structure and Competition. Papers relevant to deposit insurance include “Bond Market Discipline of Banks,” by Donald P. Morgan and Kevin J. Stiroh; “Corporate Valuation and the Resolution of Bank Insolvency in East Asia, “ by Simeon Djankov, Jan Jindra, and Leora Klapper; “Are Fiscal Costs of Banking Crises Increased by Poor Resolution Policies," by Patrick Honahan and Daniela Klingebiel; and "The Role of Subordinated Debt in Bank Safety and Soundness Regulation,” by Larry Wall. The conference also included panel discussions on reforming bank capital requirements, Too Big to Fail, and other safety net issues. A summary of the conference was published in a special issue of the Chicago Fed Letter (September 2000, no. 157a). Federal Reserve Bank of Chicago. 2002. Financial Market Behavior and Appropriate Regulation over the Business Cycle. Proceedings of the 38th Annual Conference on Bank Structure and Competition. Conference proceedings include topics such as Financial Market Behavior and Regulation over the Business Cycle; New Concerns in Financial Markets; Optimal Regulatory Policies; The Impact of Regulatory Practices and Regulatory Structure; Bank Capital Reform: Current Status and Open Issues; Bank Behavior and Macroeconomic Activity; Banking Strategies;Relationship Lending; Consumer Issues; and Geographic Expansion in Banking. Papers that deal specifically with deposit insurance and regulation include “Cyclicality and Banking Regulation,” by Alan Greenspan; “Preserving the Independence of Bank Supervision,” by John D. Hawke, Jr.; “What Can Bank Regulators Do Better,” by Donald E. Powell; “Creating Sound Supervision Practices over the Business Cycle,” by Richard Spillenkothen; “An FDIC Approach to Resolving a Large Bank,” by John F. Bovenzi; “The Challenges of Regulating Large, International Financial Organizations,” by Mark Harding; “Deposit Insurance, Moral Hazard, and Market Monitoring,” by Reint Gropp and Jukka Vesala; “Monetary Policy and Bank Supervision,” by Vasso P. Ioannidou; “The Choice of Regulators in Banking,” by Richard J. Rosen; and “The Basel II Approach to Bank Operational Risk: Regulation on the Wrong Track,” by Richard J. Herring. Feldman, Ron, and Mark Levonian. 2001. Market Data and Bank Supervision: The Transition to Practical Use. Federal Reserve Bank of Minneapolis Region 15, no. 3:11– 13, 46–54. Economic research conducted over the last several years has shown that market prices contain information on the riskiness of banking organizations. Can bank supervisors use this information to enhance their assessment of a bank’s financial condition? The authors of this essay argue that they can and should. Specifically, the authors offer three ways in which market data should be routinely used in the supervisory process: (1) to help supervisors assess the overall condition of banking institutions, (2) to help them assess the quality of loans and capital, and (3) to facilitate supervisory responses to institutional risk taking. Moreover, the authors recommend that despite some inherent difficulties in using market data, bank supervisors should move quickly to broaden their use of this information so as to gain practical knowledge about the data’s strengths and weaknesses and about the best way of using the data to improve the supervisory process. Feltenstein, Andrew, and Roger Lagunoff. 2003. International versus Domestic Auditing of Bank Solvency. IMF Working Paper WP/03/190. International Monetary Fund. Transparency in reporting financial information is widely viewed as key to reducing or preventing losses from bank insolvencies. It is unclear, however, just how such transparency is best achieved. In this paper, the authors use a game-theoretic approach to compare the effectiveness of two alternative institutional approaches for auditing bank balance sheets. The first of these is a system of central bank auditing of national banks; the second uses an international agency to facilitate information disclosure. The authors’ results show that the international auditor performs at least as well as, and sometimes better than, the central bank auditors, whose performance, in turn, is better than voluntary disclosure by banks themselves. Frexias, Xavier, and Anthony M. Santomero. 2003. An Overall Perspective on Banking Regulation. Economics Working Papers. Department of Economics and Business, Universitat Pompeu Fabra. [http://www.econ.upf.edu/docs/papers/downloads/664.pdf]. In this paper, the authors try to place in context how asymmetric information theory has affected the issues central to the theories of banking and banking regulation. First, they review the effect of imperfect information on the profession’s understanding of why financial markets exist, how they operate, and how they are regulated. Next, the authors identify and discuss the types of market failures that are specific to the banking industry, and the ways in which those failures justify the existence of financial intermediaries. The authors then consider the design and effect of regulation, and they review the function of some primary regulatory instruments as well as the effect that these instruments have on banks’ behavior. Garten, Helen A. 2001. U.S. Financial Regulation and the Level Playing Field. Palgrave. Why have financial modernization and regulatory reform in the United States never led to regulatory simplification? This book attempts to answer that question by examining the forces that drive the U.S. regulatory process. In particular, the author offers an explanation for the apparent contradiction between the United States'U.S.’s stated commitment to freer and more open financial markets and the fact that the nation’s financial markets really do not appear all that open or free. In brief, her explanation is that regulation is legitimized to the extent that it improves the level of competitive fairness, or level playing field, that U.S. financial market players demand from their system. Several examples of how regulation is being used to further the competitive fairness of U.S. financial markets are provided. Gilbert, R. Alton, Andrew P. Meyer, and Mark D. Vaughan. 2000. The Role of a CAMEL Downgrade Model in Bank Surveillance. Working Paper no. 2000-021A. Federal Reserve Bank of St. Louis. This paper compares two models that seek to predict when bank supervisory ratings will be downgraded to problem status. The first is a model used by the staff of the Board of Governors of the Federal Reserve to predict bank failures; the second is a model estimated specifically to predict downgrades of supervisory ratings. Although both models seem equally effective in predicting downgrades when using historical data from the early 1990s, the downgrade model’s predictive power improves over the sample time period and eventually surpasses the effectiveness of the failure model. The authors suggest that the downgrade model may be a useful addition to supervisory analysis, especially during periods in which most banks are healthy, but that it should not supplant traditional supervisory practices. Gilbert, R. Alton, Andrew P. Meyer, and Mark D. Vaughan. 2002. Could a CAMELS Downgrade Model Improve Off-Site Surveillance? Federal Reserve Bank of St. Louis Review 84, no. 1:47–64. The Federal Reserve’s off-site surveillance system—used to identify banks that require closer supervisory scrutiny—includes two distinct econometric models that are known collectively as the System for Estimating Examination Ratings (SEER). One model, the risk-rank model, uses a bank’s latest financial statements to estimate the probability that the particular bank will fail within the next two years. The second model, the SEER rating model, uses the same financial information to produce a “shadow” CAMELS rating for each bank. Unfortunately, because the financial data used by the SEER models is backward looking, many of the banks identified by the SEER models have already begun to deteriorate. In this paper, the authors test an alternative model that they hope will better identify banks headed for financial distress. More specifically, the authors’ model is used to identify banks with composite CAMELS ratings of 1 or 2 that are likely to receive downgrades to composite ratings of 3, 4, or 5 in the subsequent two years. Over a range of two-year test windows, the authors find that their CAMELS downgrade model outperformed the SEER models by only a small margin. Their downgrade prediction model does have the potential, however, for improved predictions during the early stage of an economic contraction—when downgrades are more frequent but failures are still relatively rare. Gilbert, R. Alton, and Mark D. Vaughan. 2000. Do Depositors Care about Enforcement Actions? Working Paper 2000-020A. Federal Reserve Bank of St. Louis. Economists claim that public revelation of bank supervisors’ formal enforcement actions will enhance market discipline, whereas supervisors fear that such public disclosure will trigger bank runs. This study examines depositors’ reactions to recent Federal Reserve announcments, comparing depositors’ reactions to affected banks with their behavior toward banks not named in the announcments. The results demonstrate no evidence of unusual deposit runoffs or significant increases in deposit costs at affected banks, suggesting that the disclosures do not inspire depositor panic. However, although depositors seemed to be indifferent to enforcement announcements in the 1990s, they might be more responsive to such information in a less-favorable banking environment. Gup, Benton E., ed. 2000. The New Financial Architecture: Banking Regulation in the 21st Century. Quorum Books. This book contains selected writings detailing methods of bank regulation that have been proposed to cope with the rapidly changing financial markets. Titles include “Regulating International Banking: Rationale, History, and Future Prospects,” by Ronnie J. Phillips and Richard D. Johnson; “Are Banks and Their Regulators Outdated?” by Benton E. Gup; “Designing the New Architecture for U.S. Banking,” by George G. Kaufman; “What Is Optimal Financial Regulation?” by Richard J. Herring and Anthony M. Santomero; “The Optimum Regulatory Model for the Next Millennium—Lessons from International Comparisons and the Australian–Asian Experience,” by Carolyn Currie; “Banking Trends and Deposit Insurance Risk Assessment in the 21st Century,” by Steven A. Seelig; “Supervisory Goals and Subordinated Debt,” by Larry Wall; “Market Discipline for Banks: A Historical Review,” by Charles G. Leathers and J. Patrick Raines; “Market Discipline and the Corporate Governance of Banks: Theory vs. Evidence,” by Benton E. Gup; “Message to Basel: Risk Reduction Rather Than Management,” by Johannes Juttner; and “Drafting Land Legislation for Developing Countries: An Example from East Africa,” by Norman J. Singer. Hall, Maximilian J. B., ed. 2001. The Regulation and Supervision of Banks. Volume 1: The Case for and Against Banking Regulation. Volume 2: Deposit Insurance. Volume 3: The Regulation of Bank Capital. Volume 4: Regulation and Efficiency in Banking. JAI Press. This is a four-volume reference collection of articles about the regulation of banks. Volume 1 covers (a) the cases for and against banking regulation, and (b) the design of an “optimal” regulatory frame work.. Volume 2 on deposit insurance examines arguments for and against the its adoption of deposit insurance as well as the problems that may occur in implementing a deposit insurance scheme. Volume 3 explores the issue of capital adequacy assessment, touching on the role played by capital and capital regulation and on the assessment of capital adequacy at international banks. Volume 4 deals with the links between regulation and efficiency in banking. Han, Intaek. 2002. Governing Financial Markets: Politics and Institutions in the Regulation of Financial Risk. Ph.D. diss., University of California–Berkeley. The first of the three essays that make up this dissertation revisits the origins of state deposit insurance in the early twentieth century in the United States to understand why otherwise similar states responded to recurring banking crises differently. The author finds that Progressivism, legislative shifts, and interstate competition contributed to the adoption of deposit insurance legislation at the state level. The second essay extends the investigation by studying the adoption of deposit insurance in different countries between 1975 and 1995. By using event-history analysis, the author finds that proportional representation, along with banking crises and diffusion, helps explain deposit insurance adoption. The third essay is motivated by findings from existing studies on deposit insurance that indicate that the effect of deposit insurance on a country’s financial stability is not consistent across countries. The essay therefore examines whether three structural characteristics of bank regulatory institutions—functional separation, external interference, and fragmented authority—can explain banking crises. Generally, the study finds that crises in developing countries are better explained by politics and institutions than by banking crises in developed countries. Heinrichs, Hanna. 1999. Barings: Leçons pour la réglementation prudentielle des banques. Editions de l’Université de Bruxelles. [In French without English summary.] This book dicusses the fall of Barings, focusing on how failures of internal and external controls paved the way for the bank’s demise, highlighting obvious gaps in those current control mechanisms, and discussing future regulatory trends. The book begins with a general discussion of recent trends in the banking industry and the evolving goals and functions of bank regulation, especially as they relate to global financial diversification and the new need for cooperation between different regulatory authorities. The author then explains the specific complexities posed by derivatives and the challenges to regulators who seek to implement risk-management controls and capital standards. Finally, the author details the events that led to Baring’s failure and draws lessons for the future, suggesting ways in which prudential regulation of banking institutions can be improved to prevent similar collapses. Jagtiani, Julapa. 2003. Early Warning Models for Bank Supervision: Simpler Could Be Better. Federal Reserve Banks of Chicago’s Economic Perspectives 27, no. 3:49–60. Can computer-based models, using publicly available information, be used as off-site early warning systems (EWS) to identify banks that will become inadequately capitalized in the near future? The EWS models analyzed in this article are able to detect the early onset of financial distress one year in advance with a reasonable degree of accuracy. Although simple EWS models do as well as or better than more sophisticated ones, more sophisticated models could provide more detailed information about individual bank strengths and weaknesses. (© 2003 FRB of Chicago) Jagtiani, Julapa, and Catharine Lemieux. 2000. Market Discipline Prior to Failure. Emerging Issues Series S&R-2000-14R. Federal Reserve Bank of Chicago. This paper investigates how the bonds issued by bank holding companies are priced when a subsidiary is poised to fail. The findings show that during the period when the subsidy from deposit insurance is most crucial, just before a subsidiary bank’s failure, bond spreads increase to indicate the subsidiary’s financial deterioration. The implication is that increasing subordinated debt requirements would probably be an effective way to increase market discipline in the banking industry. This mechanism could be made even more accurate with improved and timely disclosures of information. Jordan, John S. 2000. Depositor Discipline at Failing Banks. Federal Reserve Bank of Boston New England Economic Review (March): 15–28. Uninsured depositors, whose deposits are not fully protected by federal deposit insurance, have an incentive to monitor banks' activities and impose additional funding costs on risky banks. This pricing is a form of market discipline, since the market penalizes banks for taking on greater risk. For banks that become troubled, market discipline can take a more severe form: market participants may become unwilling to supply uninsured funds at any reasonable price. This study examines the effectiveness of depositor discipline at banks that failed in New England in the early 1990s. The empirical analysis examines whether failing banks in New England faced depositor discipline as they became troubled in the early 1990s, and whether these banks attempted to shield themselves from this discipline. Failing banks in New England experienced a 70 percent decline in their uninsured deposits in their final two years of operation. The author finds that despite the magnitude of the gap to fill, and despite the presence of close regulatory scrutiny, many failing banks increased their use of insured deposits enough to offset much of the shortfall created by the decline in uninsured deposits, diminishing the effectiveness of market discipline by depositors. (© 2002 EconLit) Kaufman, George G., ed. 2000. Bank Fragility and Regulation: Evidence from Different Countries. Research in Financial Services: Private and Public Policy, vol. 12. JAI Press. Ten papers, presented at three invited sessions at the annual meeting of the Western Finance Association in Vancouver in July 2000, contribute to the understanding of the causes, symptoms, and consequences of banking problems by studying banking fragility and regulation in different countries. Papers examine the effects of bank regulation and financial structure on the likelihood and costs of banking crises in a diverse group of countries; the origin, objectives, and functioning of the European Shadow Financial Regulatory Committee and its recommendations; subordinated debt and bank capital reform; challenges to the structure of financial supervision in the European Union; deposit rate premiums and the demand for funds by thrifts; a regulatory regime for financial stability; the 1997 Market Risk Amendment to the Basel Capital Accord, which formally incorporates banks' internal, market-risk models into regulatory capital calculations, and lessons for the development of internal models-based approaches to bank regulation and supervision; the role of a CAMEL downgrade model in bank surveillance; credit registers and early warning systems of bank fragility; and deposit insurance funding and insurer resource allocation. (© 2002 EconLit) Kaufman, George G., ed. 2002. Market Discipline in Banking: Theory and Evidence. Research in Financial Services: Private and Public Policy, vol. 15. Elsevier Science Ltd. In recent years, an international consensus has formed among regulatory agencies and academics that the safe and efficient operation of a banking system cannot be guaranteed by regulation and supervisory review alone. Rather, bank regulation needs to be supplemented by market discipline, whereby at-risk bank creditors and other stakeholders have an incentive to monitor the financial performance of the bank and to take action to influence bank management if they find such performance has become too risky or otherwise unsatisfactory. The papers in this volume discuss the advantages of market discipline. They consider the basic role of market discipline, its application to banking and to large nonbank financial institutions, the evidence of its effectiveness to date, and its potential for further integration into the supervisory and regulatory systems. The papers were all presented at special sessions at the annual meeting of either the Financial Management Association International in Dublin, Ireland, in June 2003, or the Western Finance Association in Vancouver, Canada, in July 2003. Papers include “Resolving Large Complex Financial Organizations,” by Robert Bliss; “The Impact of Supervisory Disclosure on the Supervisory Process: Will Bank Supervisors be Less Likely to Downgrade Banks?” by Ron Feldman, Julapa Jagtiani, and Jason Schmidt; “Market Discipline: A Theoretical Framework for Regulatory Policy Development,” by Paul Hamalainen, Maximilian Hall, and Barry Howcraft; “International Financial Conglomerates: Implications for Bank Insolvency Regimes,” by Richard Herring; “Market Discipline and Financial Crisis Policy: A Historical Perspective,” by Michael Bordo; “The Role of Market Discipline in Handling Problem Banks,” by David Llewellyn and David Mayes; “Do Uninsured Depositors Vote with Their Feet?” by Kathleen McDill and Andrea Maechler; “Market Discipline of Fannie Mae and Freddie Mac: How Do Share Prices and Debt Yield Spreads Respond to New Information?” by Robert Seiler, Jr.; “Netting, Financial Contracts, and Banks: The Economic Implications,” by William Bergman, Robert Bliss, Christian Johnson, and George Kaufman; “Interbank Netting Agreements and the Redistribution of Bank Default Risk,” by William Emmons; “Do Jumbo-CD Holders Care about Anything?” by John Hall, Thomas King, Andrew Meyer, and Mark Vaughan; “Bank Loan Underwriting Practices: Can Supervisors’ Risk Assessments Contribute to Early-Warning Systems?” by John O’Keefe, Virginia Olin, and Christopher Richardson. Kwan, Simon. 2002. The Promise and Limits of Market Discipline in Banking. Federal Reserve Bank of San Francisco Economic Letter no. 36 (December 13). An issue of some importance to bank regulators is how to leverage market discipline to supplement their supervisory efforts. Yet, while the concept of market discipline is promising, a number of practical concerns require careful consideration. This letter discusses the promises and limits of market discipline in banking. Lin, Wei-Yi. 2000. The Role of the Financial Early-Warning System in Strengthening Financial Supervision and the Deposit Insurance Mechanism. Paper presented at the International Conference on Early-Warning Systems for Financial Crises, Taipei, Taiwan, January 20–21, 2000. The author discusses the importance of establishing a financial early-warning system, the history and current operating conditions of the financial early-warning system in the Republic of China, the contribution of China’s financial early-warning system to the strengthening of financial supervision and the deposit insurance mechanism in that country, the feasibility of using international cooperation to establish a regional financial early-warning system to prevent the occurrence of financial crises, the effect that strengthening the financial early-warning system may have on financial supervision and the deposit insurance mechanism in the future, and the problems that may occur. Llewellyn, David T. 2000. Some Lessons for Bank Regulation from Recent Crises. Paper no. 51. De Netherlandesche Bank. Also 1999. Some Lessons for Bank Regulation from Recent Crises. Finance and Development Research Programme Working Paper Series, no. 11. Loughborough University. United Kingdom. This paper discusses the concept of regulatory strategy, which involves optimizing the outcome of the regulatory regime as a whole rather than focusing on any of the particular components. Regulation is one part of the regulatory regime, but other aspects—for example, supervision—are equally important (and shareholders, managers, and the market all have a role in supervising financial firms). The author suggests an optimum “regulatory regime” that has seven key components: regulation, official supervision, incentive structures within banks, market discipline, intervention arrangements and corporate governance arrangements, and the accountability of the regulatory agencies. Since there are trade-offs between the components, effective regulatory strategy needs to focus on the overall effect of the regime and not just on regulation. Maclachlan, Fiona C. 2001. Market Discipline in Bank Regulation: Panacea or Paradox? Independent Review 6, no. 2:227–34. Central bankers often speak of the three pillars supporting the safety and soundness of the banking system: regulation, supervision, and, increasingly, market discipline. Paradoxically, many recent proposals intended to improve market discipline would in fact undermine it by giving rise to counterproductive regulatory discretion. (© 2001 EconLit) Malloy, Michael P. 2003. Principles of Bank Regulation. 2nd ed. West Group. This handbook is designed for law students studying the regulation of depository institutions. Chapters that deal specifically with deposit insurance include chapter 2, Entry Rules; chapter 5, Transactional Rules; chapter 7, Securities Regulation; chapter 8, Resolution of Institutional Failures; chapter 9, International Banking; and chapter 10, Bank Regulation and Social Policy. Mikdashi, Zuhayr. 2003. Regulating the Financial Sector in the Era of Globalization. Palgrave Macmillan. This book examines the interdependent roles that public authorities and business executives have in preventing, containing, and resolving a financial crisis. The author also examines economic, sociopolitical, and managerial factors that are important to the optimal regulation of financial institutions. The author begins with an overview of all the economic risk factors and shows that if the factors are not controlled, they will eventually result in a financial crisis. He then describes the roles that government regulation and supervision play in preventing a crisis. Different aspects of governmental safety nets are examined, as is the effect that international organizations (such as the International Monetary Fund) have on financial stabilization. He concludes with a discussion of the importance of judgment in the assessment and control of risks. Mishkin, Frederic S. 2000. Prudential Supervision: Why Is It Important and What Are the Issues? Working Paper no. W7926. National Bureau of Economic Research. This working paper was prepared for the NBER conference “Prudential Supervision: What Works and What Doesn’t?” held in Islamorada, Florida, January 13–15, 2000. It begins with an overview of the asymmetric information problems in the financial system and discusses how banks play a critical role in overcoming these problems. The author then explains why, giving banking institutions’ important role in the financial industry, effective supervision is crucial; and, drawing on the conference papers, he discusses how such supervision can be designed. The paper concludes with a general overview of the papers presented at the conference. Mishkin, Frederic S., ed. 2001. Prudential Supervision: What Works and What Doesn’t. University of Chicago Press. This volume contains a collection of papers and comments presented at a conference held by the National Bureau of Economic Research in January 2000. Papers include “Prudential Supervision: Why Is It Important and What Are the Issues,” by Frederic S. Mishkin; “Banking Systems around the Globe: Do Regulation and Ownership Affect Performance and Stability?” by James R. Barth, Gerard Caprio, Jr., and Ross Levine; “Supervising Large Complex Banking Organizations: Adapting to Change,” by Laurence H. Meyer; “Market Discipline in Governance of U.S. Bank Holding Companies: Monitoring versus Influencing,” by Robert R. Bliss and Mark J. Flannery; “Can Emerging Market Bank Regulators Establish Credible Discipline? The Case of Argentina, 1992–99,” by Charles W. Calomiris and Andrew Powell; “Dimensions of Credit Risk and Their Relationship to Economic Capital Requirements,” by Mark Carey; “Obstacles to Optimal Policy: The Interplay of Politics and Economics in Shaping Bank Supervision and Regulation Reforms,” by Randall S. Kroszner and Philip E. Strahan; “Synergies between Bank Supervision and Monetary Policy: Implications for the Design of Bank Regulatory Structure,” by Joe Peek, Eric S. Rosengren, and Geoffrey M. B. Tootell; and “Did U.S. Bank Supervisors Get Tougher during the Credit Crunch? Did They Get Easier during the Banking Boom? Did Iit Matter to Bank Lending?” by Allen N. Berger, Margaret K. Kyle, and Joseph M. Scalise. Morel, Christophe. 2000. Deposit Insurance as a Tool for Banking Supervision. Revue d'économie financière, no. 60:233-44. [Published in English.] After reminding the reader of the economic justifications of bank regulation, this paper pays particular attention to one of the instruments of this regulation, the deposit insurance. While offering a protection to the depositors, the deposit insurance would allow to prevent bank runs and thus reduce the occurrence probability of a systemic crisis. The author presents the features of such a scheme identified as "optimal" in the academic literature in the sense that they avoid moral hazard and adverse selection phenomena. Thus, ideally, the system should be public and compulsory for all banks; the guarantee should be limited and all-in price; the premium paid by the banks should directly depends on each bank's risk level. (© 2002 EconLit) Morgan, Donald P., and Kevin J. Stiroh. 2000. Bond Market Discipline of Banks: Is the Market Tough Enough? Staff Report No. 95. Federal Reserve Bank of New York. This study uses bond spreads, ratings, and bank portfolio data on more than 4,100 new bonds issued between 1993 and 1998 to analyze the disciplinary role of markets. The findings demonstrate that the market prices of bonds serve as efficient indicators of bank risk. Investors assess not only bond ratings but also banks’ loans and assets in making their decisions. The market effectively disciplines banks such that an institution undertaking riskier activities can expect to pay higher spreads. But this disciplinary mechanism is less effective for bigger or more-complex banks; the implication is that other means of disciplining bank risk-taking might be appropriate in some cases. Mwenda, Kaoma Mwenda. 2000. Banking Supervision and Systemic Bank Restructuring: An International and Comparative Legal Perspective. London: Cavendish Publishers. This book, which provides an international, comparative perspective on legal issues in banking supervision and bank restructuring, is based on the premise that banking regulation is most effective when it smoothly and rationally incorporates the legal and extralegal (economic, political, sociocultural, and financial) aspects of supervision. The book examines such contemporary topics as the design and implementation of financial restructuring, the interactions between banks and nonbank financial-service providers and the ways in which these relationships affect bank supervision, methods of preventing and containing contagion problems, and the suitability of having a single prudential regulator. The author draws on various countries’ experiences with bank reform efforts to illustrate the pertinent legal issues, while also emphasizing the importance of an interdisciplinary approach to bank regulation. Norton, Joseph J. 2001 Selective Bank Regulatory and Supervisory Trends upon Entering the 21st Century. Essays in International Financial and Economic Law, no. 34. London Institute of International Banking and Development Law. The first part of this three-part essay examines the environment facing the banking industry and bank supervisors. Special attention is paid to the debate about the structural context of bank supervision, the increasingly legislative nature of modern financial sector reform, the increasing globalization of financial services, and the pursuit of an international financial architecture. The second part of the essay discusses specific supervisory trends, such as the idea of a supervisory “public-private partnership,” the redefinition of the “business of banking,” and the regulatory issues raised by the existence of large, complex banks. The focus of the final part of the essay is on the need to create more-advanced “portfolio credit risk” approaches to bank supervision and the challenges to doing so. Nuxoll, Daniel A. 2003. The Contribution of Economic Data to Bank-Failure Models. Working Paper 2003-03. Federal Deposit Insurance Corporation. The wave of bank failures during the late 1980s and early 1990s was caused partly by a series of regional recessions. This paper examines whether the FDIC can use state-level economic data to forecast bank failures. The author finds that these data do not improve failure prediction models that use only bank-level data. The paper also proposes a number of explanations for this result. Pages, Henri, and Joaoa A. C. Santos. 2003. Optimal Supervisory Policies and Depositor- Preference Laws. Working Paper no. 131. Bank for International Settlements. This paper examines the cost of having supervisors continuously monitor a bank in order to have accurate information about the bank’s stability. The authors study the trade-off entailed in increasing the time between supervisory visits. On the one hand, increasing the time would reduce auditing costs but, on the other hand, it would increase the likelihood that bank shareholders would have to close the bank. Closings by shareholders are more costly than bankruptcies declared by supervisors. Two types of supervisors are examined: the independent supervisor who realizes only the costs of supervision and of bankruptcy, and the supervisor who also realizes the cost that bankruptcy imposes on the deposit insurance provider. The authors use the second supervisor to study the effect of depositor-preference laws. They find that the effect of these laws on the supervisor’s monitoring incentives may lead to contradictory effects on the optimal time intervals between examination visits and closure policy. Quintyn, Marc, and Michael W. Taylor. 2002. Regulatory and Supervisory Independence and Financial Stability. Working Paper 02/46. International Monetary Fund. Financial-sector regulatory and supervisory independence (RSI) is important to financial stability. In this paper, the authors maintain that poor supervisory arrangements have been shown to deepen the effects of banking crises. They cite as an example the U.S. banking crisis of the 1990s and the influence of political issues on supervisory authorities. The discussion focuses on four dimensions of RSI (institutional, regualatory, supervisory, and financial) and how they can be achieved. Spencer, Peter D. 2000. The Structure and Regulation of Financial Markets. Oxford University Press. This financial textbook analyzes financial products from the perspective of information theory; explains why financial markets and institutions are prone to failure; and addresses how regulation can reduce the risk of failure and how legal and regulatory constraints help shape a country's corporate and financial structures. Discusses asymmetric information in financial markets; adverse selection in the market for retail financial services; the structure and regulation of insurance markets; capital-market microstructure and regulation; information revelation, transparency, and insider regulation; security research and regulation; the equity market and managerial efficiency; the theory of financial intermediation; moral hazard in the bank loan and public bond markets, excessive risk, and bank regulation; bank runs, systemic risk, and deposit insurance; bank regulation in practice; and financial structure and regulation. Includes end-of-chapter exercises. (© 2002 EconLit) Spong, Kenneth. 2000. Banking Regulation: Its Purposes, Implementation, and Effects. 5th ed. Federal Reserve Bank of Kansas City. This book discusses the motivations and justifications for regulating banks; the history of banking regulation; the definition and structure of banks, bank holding companies, and financial holding companies; the functions of the different bank regulatory agencies; regulations for depositor protection and monetary stability; regulation consistent with an efficient and competitive financial system; regulation for consumer protection; and future trends in banking regulation. Deposit insurance is a major component of the bank regulatory structure and, as such, is thoroughly detailed throughout the book; the author recounts the history of deposit insurance, explains the major pieces of legislation that have shaped the deposit insurance system, and descibes the current purpose and functioning of the FDIC. U.S. General Accounting Office (GAO). 2000. Risk-Focused Bank Examinations: Regulators of Large Banking Organizations Face Challenges. GAO/GGD-08-48. GAO. This study assesses the new risk-focused approaches to bank examination that are now being used by the Federal Reserve and the Office of the Comptroller of the Currency (OCC). The report describes the new techniques, which assess the effectiveness of banks’ internal controls, and explains how they differ from more traditional practices, which sought to evaluate the quality of bank assets. It also compares the ways in which these two bank regulators implement the risk-focused techniques: the OCC’s large-bank supervision program is highly centralized and standardized, whereas the Federal Reserve’s program displays much less uniformity. Finally, the study looks at the challenges faced by regulators, who must examine ever-larger and more-complex banking organizations. Walker, George Alexander. 2000. International Banking Regulation: Law, Policy and Practice. International Banking, Finance and Economic Law. vol.19. Kluwer Law International. This volume addresses all aspects of international banking supervision and financial stability. The three main headings (and the subordinate headings under each) are as follows: (1) The Basel Committee on Bank Supervision (International Banking Supervision—Financial Instability and the Establishment of the Basel Committee; International Banking Supervision and the Basel Committee Framework); (2) Financial Conglomerates (Conglomerate Law and International Financial Market Control; Lead Regulation and International Financial Market Supervision); and (3) Financial Stability (International Financial Crisis and the Financial Stability Forum; Observations with Regard to the Continued Development of International Banking and Financial Market Supervision and Control). Walker, George Alexander. 2001. International Banking Regulation: Law, Policy, and Practice. Kluwer Law International. This book examines the current regulatory framework for international banks. It details the story of the collective efforts of national regulatory authorities to deal with the threats to a single global financial market and to reduce the risks of systemic crisis. It recounts the financial crises of the past 25 years and discusses the regulatory responses to them, beginning with the establishment of the Basel Committee on Banking in 1975. Walker, David. 2002. Comprehensive Early Warning Systems and the Experience of the Canada Deposit Insurance Corporation (CDIC). South East Asian Central Banks Research and Training Centre (SEACEN). In its role as a deposit insurer charged with minimizing its exposure to loss, the Canada Deposit Insurance Corporation (CDIC) has developed various approaches to assess its risk exposure through an early warning system (EWS) for member financial institutions. This paper sets out the development of CDIC’s early warning system. Development of the early warning system draws on the CDIC’s experience with the failure of 43 member institutions during the past three decades. The key conclusion of the paper is that a well-designed EWS can be effective for the early detection of problem institutions. Weinberg, John A. 2002. Competition Among Bank Regulators. Federal Reserve Bank of Richmond’s Economic Review 88, no. 4:19–36. When banks can choose among multiple regulators, how does the interaction of the regulators affect the performance of the banking industry? This question is addressed in the context of a bank regulation model that emphasizes the role of bank examinations used to monitor banks' choices of risky investments. (© 2002 FRB of Richmond) White, Lawrence J. 2002. Bank Regulation in the United States: Understanding the Lessons of the 1980s and 1990s. Japan and the World Economy 14, no. 2:137–54. This paper discusses the importance of safety-and-soundness regulation of banks. The author outlines why this type of regulation is important to maintaining stability in banking and in the U.S. economy in general. He then describes the lessons that can be learned from the lapses of safety-and-soundness regulation that occurred over the past two decades—lapses that led to the insolvency of many savings institutions and commercial banks in the 1980s and 1990s. 5. Role of Deposit Insurance in Bank Failures Entries in this section focus on bank failures and the role deposit insurance played in those failures: the underlying causes of bank crises, failed-bank resolution methods, bank closure rules, the cost of failed-bank resolutions, and historical perspectives on the U.S. savings and loan debacle and the commercial bank crisis of the 1980s and early 1990s. Acharya, Viral V., and Tanju Yorulmazer. 2003. Information Contagion and Inter-Bank Correlation in a Theory of Systemic Risk. C.E.P.R. Discussion Paper no. 3743. Centre for Economic Policy Research. In this paper, the authors explore two aspects of systemic risk: first, the ex post aspect in which the failure of one bank brings down a surviving bank; and second, the ex ante aspect in which banks endogenously hold correlated portfolios that increase the likelihood of joint failure. In the authors’ model, when bank loan returns have a systemic factor, the failure of one bank conveys adverse information about this systemic factor and increases the cost of borrowing for the surviving banks. Such information contagion is costly to bank owners. Given banks’ limited liability, they herd ex ante and undertake correlated investments to increase the likelihood of joint survival. If depositors of a failed bank can migrate to the surviving bank, then herding incentives are partially mitigated. This, in turn, gives rise to a pro-cyclical pattern in the correlation of bank loan returns. Andrews, Michael, and Mats Josefsson. 2003. What Happens after Supervisory Intervention? Considering Bank Closure Options. IMF Working Paper WP/03/17. International Monetary Fund. Closing a bank often becomes necessary when other measures have failed to resolve problems at a weak bank. Bank supervisors, however, have often delayed closing failing institutions because of concerns about potential economic disruptions and a reluctance to impose losses on depositors. In this paper, the authors argue that timely, well-planned closures can mitigate most disruptions while preserving essential banking services. In addition to discussing failure resolution policies, the authors offer some guiding principles for the successful resolution of failing banks. Ashcraft, Adam B. 2003. Are Banks Really Special? New Evidence from the FDIC-Induced Failure of Healthy Banks. Staff Report no. 176. Federal Reserve Bank of New York. Do bank failures affect economic activity? To answer this question, the author examined the local economic effects associated with the FDIC’s closure of healthy banks: in 1988 and 1992, the FDIC used its cross-guarantee authority to close healthy bank subsidiaries when the lead banks in the parent organizations became insolvent (the cases involved First RepublicBank Corporation and First City Bancorporation). In examining these cases, the author finds evidence of a significant decline in bank lending that led to a long-term reduction in real county income of about 3 percent. On the basis of this finding, the author concludes that the closure of healthy banks does have a significant and perhaps permanent effect on real economic activity. Baltazar, Ramon, and Michael Santos. 2003. The Benefits of Banking Mega-mergers: Event Study Evidence from the 1998 Failed Mega-merger Attempts in Canada. Revue Canadienne des Sciences de l’Administration/Canadian Journal of Administrative Sciences 20, no. 3:196–208. In this paper, the authors seek to infer the benefits of and motivations behind bank megamergers by examining the stock market’s reaction to three events surrounding the 1998 failed megamerger attempts in the Canadian banking industry. Using traditional event-study methods that look for abnormal returns, the authors conclude that market power—not scale, scope, or X-efficiency economies, or access to government safety-net subsidies—was the primary benefit ascribed by shareholders to the merger proposals. The authors’ finding that enhancing market power was the most likely motive for the proposed mergers is at least consistent with the rationale provided by Canadian regulators for rejecting the merger proposals. Bennet, Rosalind L. 2001. Failure Resolution and Asset Liquidation: Results of an International Survey of Deposit Insurers. FDIC Banking Review 14, no. 1:1–28. In January 2000, the FDIC surveyed 73 foreign deposit insurance agencies regarding their failure-resolution and asset-liquidation practices. This article reports on the nature and extent of those practices and compares them with the resolution policies and practices of the FDIC. The comparison indicates that the FDIC is uniquely empowered to act expeditiously in resolving bank failures, in disposing of failed-bank assets, and in reimbursing insured depositors. The author suggests that some of the failure-resolution techniques developed by the FDIC might be effectively applied in other countries. Hoshi, Takeo. 2002. The Convoy System for Insolvent Banks: How It Originally Worked and Why It Failed in the 1990s. Japan and the World Economy 14, no. 2: 155–80. This paper assesses the effectiveness of the policies of the Japanese Ministry of Finance in the 1990s regarding bank safety and soundness. More specifically, the paper examines the ministry’s use of regulatory rewards to motivate healthy banks to acquire insolvent banks in Japan. The author finds that this “convoy” system worked well before the 1980s, but then financial deregulation caused regulatory rents to fade—reducing the incentive for healthy banks to acquire insolvent ones. Thus, the convoy system lost its effectiveness. In response, the Japanese government expanded the financial assistance program offered by the Deposit Insurance Corporation (DIC) to try to achieve the same goal: motivating healthy banks to acquire insolvent ones. The author uses case study methodology and regression analysis to assess the effectiveness of this policy. He concludes that the expansion of the DIC’s program created a moral hazard. Kaufman, George G. 2003. A Proposal for Efficiently Resolving Out-of-the-Money Swap Positions at Large Insolvent Banks. Working Paper no. 2003-01. Federal Reserve Bank of Chicago. Bank regulators in the United States have experience in efficiently resolving the on-balance-sheet activities of fairly large insolvent banks. Yet regulators have little experience in resolving the so-called off-balance-sheet activities of large banks, particularly a bank’s out-of-the-money swap positions. Consequently, there is a perception that rather than terminating these contracts and risking fire-sale losses that could cause excessive volatility in the financial markets, the regulatory agencies will instead transfer such positions to solvent banks. This paper develops a proposal for resolving these positions without requiring either abrupt terminations of the positions or protection of the bank’s in-the-money counterparties. The proposal calls for the net swap positions to still be transferred to an assuming party, but the counterparties would be charged a fee (similar to a depositor haircut) that is equivalent to the loss rate applied to other at-risk stakeholders of the insolvent bank. This procedure would avoid adverse spillovers from abrupt termination of the swap positions, while maintaining market discipline. That is, it would ensure that swap counterparties and other uninsured claimants remained at risk. Kaufman, George G. 2003. Depositor Liquidity and Loss-Sharing in Bank Failure Resolutions. Working Paper no. 2003-02. Federal Reserve Bank of Chicago. After a bank fails, uninsured depositors often face restricted access to their uninsured deposits. These liquidity-related losses are in addition to any losses suffered in the value of their deposit holdings. One way to mitigate these liquidity losses (and their potential adverse affects on real economic activity) is for the government or bank regulator to advance a payment—one equivalent to the estimated recovery value of the party’s uninsured deposits before final resolution of the failed institution. This paper analyzes the pros and cons of providing quick depositor access to uninsured deposits at failed banks and concludes that the use of advance payments in the United States materially improves the ability of regulators to resolve large insolvencies without bailouts. Kaufman, George G., and Steven A. Seelig. 2000. Post-Resolution Treatment of Depositors at Failed Banks: Implications for the Severity of Banking Crises, Systemic Risk, and Too-Big-To- Fail. Working Paper no. WP-00-16. Federal Reserve Bank of Chicago. This paper examines the sources of potential depositor losses in bank resolutions, focusing in particular on the losses incurred when regulatory delays impede access to depositors’ monies at insolvent banks. Although the possibility of such losses can induce depositors to monitor and discipline their banking institutions, it can also inspire depositors to pressure regulators to protect all deposits. In determing the optimal delay time, one must balance the potential gains from additional market discipline against the losses from increased bailout pressure. To this end, the paper assesses depositor access and funds availability at insolvent institutions as reported in a recent FDIC survey of deposit insurance practices across 64 countries. The survey indicates that the United States is one of the few countries whose deposit insurer does not freeze funds but advances monies almost immediately after a failure. In contrast, many other nations impose financial and legal restrictions that delay payments to both insured and uninsured depositors. The paper argues that the best strategy for achieving bank-system stability is to provide depositors with full and immediate access to their funds. Krieg, John Michael. 1999. Four Essays on Deposit Insurance, Bank Branching, and Bank Performance (Profitability). Ph.D diss., University of Oregon. This dissertation examines the effect that bank branching restrictions and deposit insurance guarantees have on bank failures and bank profitability in the United States. The work begins with an historical overview of bank branching and deposit insurance, positing that legislation designed to preclude extensive branching also prevented banks from adequately diversifying their assets and thus was a major factor contributing to the massive number of bank failures during the Great Depression. These failures, in turn, led to the establishment of the deposit insurance program, which was meant to safeguard the stability of the banking system. However, deposit insurance itself can actually contribute to bank failures, inasmuch as the safety net encourages banks to undertake riskier activities while holding less bank capital. Morris, Roselyn E., and Jerry R. Strawser. 1999. An Examination of the Effect of CPA Firm Type on Bank Regulators’ Closure Decisions. Auditing 18, no. 2:143–58. This study examines whether the type of accounting firm that audits a bank influences that bank’s chances of being closed by regulators. The authors find that when banks’ financial and other characterisitics are held constant, the type of CPA firm (Big 6 or non– Big 6) that performs a bank’s audit does in fact help determine regulators’ decisions. Specifically, banks that engaged Big 6 firms were more likely to be left open. Of all banks that received modified audit opinions, the institutions that had been audited by a Big 6 firm were less likely to be closed than those that received the opinion from a non– Big 6 firm. One explanation for this result is that regulators may perceive Big 6 firms as more likely than other firms to issue modified audit opinions because the Big 6 face greater economic and legal risks (loss of clients, litigation) if they are found negligent in conducting audits or reporting results. Olson, G. N. 2000. Banks in Distress: Lessons from the American Experience of the 1980s. Kluwer Law International. In this book the author offers his perspectives on the lessons to be drawn from the U.S. banking crisis of the 1980s. The work includes an historical review of banking in the United States, with particular focus on the policies that gave rise to the crisis. The author argues that uncoordinated monetary and fiscal policies combined with haphazard implementation of bank regulatory and enforcement policies to produce the crisis. The book also highlights the critical role played by asset valuation, asset-value inflation and deflation, and capital adequacy in the development and enactment of an effective regulatory regime. Finally, the author suggests that governments need to design more transparent, coordinated, and proactive policies to ensure stability in their financial sectors. Seidman, L. William. 2000. Full Faith and Credit: The Great S&L Debacle and Other Washington Sagas. 2d ed. Washington, D.C.: Beard Books. This memoir documents the author’s tenure as Chairman of the FDIC and the Resolution Trust Corporation during the U.S. savings and loan and banking crises of the 1980s. He delineates the causes of the S&L crises and details the ways in which the bank regulatory agencies.the FDIC in particular.worked to resolve the financial institutions’ problems. He also provides political insight, describing his dealings with bureaucrats, lawmakers, politicians, and the press. Sprague, Irvine H. 2000. Bailout: An Insider’s Account of Bank Failures and Rescues. 2d ed. Washington, D.C.: Beard Books. This book, by a former Chairman and Board member of the FDIC, examines the largest bank bailouts of the 1980s, focusing specifically on Unity Bank, Bank of the Commonwealth, First Pennsylvania Bank, and Continental Illinois. As interest rates soared in the late 1970s and early 1980s, banks and savings and loan associations suffered severely, and hundreds of financial institutions failed. In the face of this financial crisis, the author reveals the inner workings of the FDIC and provides a personal account of the Corporation’s approach to bank failures, rescues, and resolutions. 6. Economics of Deposit Insurance Entries in this section are more academic than entries in the other sections and focus on the following: bank risk taking, managerial incentives, bank stability, portfolio choice, charter values and shareholder return, and bank capital regulation. Also discussed are the costs and benefits of deposit insurance. Bartholdy, Jan, Glenn W. Boyle, and Roger D. Stover. 2003. Deposit Insurance and the Risk Premium in Bank Deposit Rates. Journal of Banking and Finance 27, no. 4:699–717. By placing a ceiling on the amount of possible depositor loss, deposit insurance should result in a lower deposit risk premium. However, this effect may be modified if either the insurance promise has low credibility or the moral hazard incentives generated by deposit insurance result in a greater probability of bank default. Using financial and institutional panel data from thirteen countries, the authors find that the risk premium is over 40 basis points higher on average in uninsured countries than in countries that offer insurance up to some pre-specified maximum. However, the risk premium has a non-linear relationship with the level of maximum insurance coverage, suggesting that the market recognizes the moral hazard potential. Moreover, the effect of deposit insurance on the risk premium is weaker in countries with strong creditor rights, consistent with the view that investors view the latter as a substitute for explicit deposit insurance. (© Elsevier Sciences B.V.) Biswas, Rita, Donald R. Fraser, and Gregory Hebb. 2000. On the Shareholder Wealth Effects of Deposit Insurance Premium Revisions on Large, Publicly Traded Commercial Banks. Journal of Financial Research 23, no. 2:223–41. This paper analyzes market responses to several deposit insurance premium change announcements. The authors find that announcements of premium changes are negatively associated with abnormal returns in banking institutions’ share values. These results are generally consistent with the premium absorption theory. However, the market adjustments to deposit insurance premium revisions vary with the type of bank; large banks are more affected than smaller ones. Further, share values are more affected at banks with low equity-to-asset ratios than at well-capitalized banks. The authors suggest these differences may reflect the differing competitive nature of the markets served by individual banks in that market competitiveness may affect a bank’s ability to shift the cost of deposit insurance to its loan and deposit customers. Boyd, John H., Chun Chang, and Bruce D. Smith. 2002. Deposit Insurance: A Reconsideration. Journal of Monetary Economics 49 no. 6:1235–60. This paper undertakes a simple general equilibrium analysis of the consequences of deposit insurance programs, the way in which they are priced, and the way in which they fund revenue shortfalls. In the author’s model of the economy, the central issue in analyzing deposit insurance is how the government will make up any FDIC losses. Deposit insurance premia matter only in so far as they affect the level of implied FDIC revenue shortfalls. Moreover, local variations in the magnitude of FDIC losses will generically be irrelevant for the determination of any equilibrium quantities that affect agent welfare. However, large enough changes in these losses can “matter”. There is no presumption that keeping these shortfalls low is a “good idea”. Finally, the authors show that multiple Pareto-ranked equilibria can be observed. The potential for multiplicity of equilibria may depend on components of FDIC policy. The analysis provides counterexamples to the following prescriptions: (1) Actuarially fair pricing of deposit insurance is always undesirable. (2) Implicit FDIC subsidization of banks through deposit insurance is always undesirable. (3) “Large” FDIC losses are necessarily symptomatic of a poorly designed deposit insurance system. (4) Risk-based deposit insurance premia can easily be used to reduce moral hazard problems associated with deposit insurance provision. (© Elsevier Science B.V.) Carow, Kenneth A., and Edward J. Kane. 2002. Event-Study Evidence of the Value of Relaxing Long-Standing Regulatory Constraints on Banks, 1970–2000. Quarterly Review of Economics and Finance 42, no. 3:439–63. In a partial-equilibrium model, removing a binding constraint creates value. However, in general equilibrium, the stakes of others parties in maintaining the constraint must be examined. In financial deregulation, the fear is that expanding the scope and geographic reach of very large institutions might unblock opportunities to build market power from informational advantages and size-related safety-net subsidies. This paper reviews and extends event-study evidence about the distribution of the benefits and costs of relaxing long-standing geographic and product-line restrictions on U.S. financial institutions. The evidence indicates that the new financial freedoms may have redistributed rather than created value. Event returns are positive for some sectors of the financial industry and negative for others. Perhaps surprisingly, where customer event returns have been investigated, they prove negative. (© 2002 Elsevier Science B.V. / 2002 Board of Trustees of the University of Illinois) Cooper, Russell, and Thomas W. Ross. 2002. Bank Runs: Deposit Insurance and Capital Requirements. Internatio