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FDIC Banking Review
* Jane F. Coburn is a senior financial analyst, and John P. O’Keefe is the Chief of the Financial Risk Measurement Section in the FDIC’s Division of Insurance and Research. The authors thank Christine Brickman and Angela Lengyel for research assistance and James Marino for helpful comments.
1 The financial safety net may be broadly defined as government support of private sector borrowers through explicit and implicit guarantees and other means (Walter and Weinberg (2002)). Defined in this way, the financial safety net extends to both financial and nonfinancial businesses. This article, however, defines the financial safety net more narrowly as the deposit insurance system for banks and thrift institutions.
2 Austria, Germany, and Italy have multiple deposit insurers. Not every question was answered by every respondent, so for each question there may have been fewer than 37 responses.
3 Bennett (2001).
4 Table 1 lists the survey respondents in their respective categories.
5 Should a bank fail, insured depositors typically receive full compensation for their insured deposits from the FDIC within one to two business days. However, they still face the risk of having to re-deposit their funds in banks that offer lower interest rates or charge higher service costs or do both.
6 To the extent that the deposit insurer (or another government authority) has other "safety-net" duties aside from meeting insured depositors’ claims, it might have additional needs for information. The additional duties that entail additional needs for information include selecting failure-resolution methods, acting as receiver and liquidator of failed banks, supervising banks for safety and soundness, pricing deposit insurance, and managing the insurance fund. Those and other additional duties are not discussed in this article.
Countering these demands for financial disclosure is banks’ need to shield their proprietary information from competitors and to protect any proprietary information that they require their customers to disclose. In addition, the costs and burdens of providing information limit the extent to which it is feasible to disclose information to financial markets and government authorities.
7 Research on U.S. banks suggests that bank safety-and-soundness examinations (discussed below) provide some important auditing functions that private sector auditors do not seem to provide; see Dahl, Hanweck, and O’Keefe (1998).
8 All federal and state bank examiners use a rating system that focuses on six components of the on-site examination findings: capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk. Each of those components is rated. At the end of the examination, the overall condition of the institution is evaluated and a composite rating from 1 to 5 is determined. An institution performing well above average receives a composite rating of 1 (the best rating), and an institution in severe financial difficulties with a strong probability of failure within 12 months receives a composite rating of 5 (the worst rating).
9 Garcia ((2001), 51) states that a deposit insurance agency "should be able to request the [relevant] supervisor to undertake a special examination of any insured financial institution that [the deposit insurance agency] feels may be in financial difficulties. Whether [the deposit insurance agency] staff should be able to participate in onsite inspections would vary from country to country."
10 Demirguc-Kunt and Kane (2001), 25.
11 Some reported information is made available only to bank regulators and is not publicly disclosed.
12 Garcia (2001), 19.
13 Significant differences exist between U.S. generally accepted accounting standards and internationally accepted accounting standards. The U.S. Securities and Exchange Commission requires financial statements that were prepared in accordance with international accounting standards to be reconciled with the U.S. GAAP.
14 FDIC (1995), 31.
15 FDIC (1997), 1:140–41.
16 Many of the survey respondents are able to assess the health of insured depository institutions. Of the 35 respondents to the following survey question, 20 answered "Yes": Do you use the data available to you to regularly assess the health of insured depository institutions? (See Table 10.) Eleven of the "Yes" respondents operate in advanced economies and 9 in developing economies and economies in transition.
17 FDIC (1997), 15.
18 FDIC (2000a), 109.
19 If deposit insurance is funded after failure losses are incurred, the insurer might still need to predict bank failures. If insurance losses are fully funded by the government, forecasts might be needed for government budget planning; and if insurance losses are fully funded by banks, banks might also need forecasts for budgetary reasons.
20 The Federal Deposit Insurance Act has provisions to ensure that failure resolutions do not seriously disrupt financial markets and the economy. If written recommendations from the FDIC Board of Directors, the Board of Governors of the Federal Reserve System, and the secretary of the U.S. Department of the Treasury (in consultation with the president) indicate that the use of regular statutory (least-cost) failure-resolution procedures might have serious adverse effects on economic conditions or financial stability, a less-disruptive procedure must be used even if it increases the costs of resolution.
21 Garcia (2001), 11.
22 Garcia (2001), 53. "Haircuts" is generally defined as full or partial losses on uninsured deposits when a bank fails.
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