Consequently, with regard to loans to critically undercapitalized banks, the Federal Reserve did not violate the terms of the FDICIA
A principal motivation behind the provisions on lending to undercapitalized banks in FDICIA
was the claim that Federal Reserve loans had merely forestalled inevitable bank failures during the 1980s, which may have increased losses to the FDIC's Deposit Insurance Fund when those banks were ultimately closed.
This paper examines the impact that the PCA standards had on bank portfolios following the passage of FDICIA
Regulators can improve the probability of the structure working as intended at least cost to taxpayers by increasing bank capital requirements to levels closer to those required by the market for noninsured bank competitors and by reinforcing their own political resolve to act consistently with the spirit as well as the letter of FDICIA
In the event, the least-cost resolution provisions of FDICIA
were at least a partial success, terminating 100 percent de facto deposit insurance for almost all banks.
However this ultimately comes out, since FDICIA
there has been no sound policy basis for the federal government to protect itself by regulation against losses it might suffer through the deposit insurance system.
00 Total number issued per annum 4 18 10 Post- FDICIA
Period Period 1991 1992 1993 Maturity (percent) Less than ten years 46.
Policy guiding regulators' approach to troubled banks is established by the Prompt Corrective Action (PCA) rules, found in Section 131 of the FDICIA
banks and other creditors, such as fed funds sellers, have claims junior to those of domestic depositors and, unless the "too big to fail" provision of FDICIA
is invoked, will be paid the recovery value of their claims only as the bank's assets are sold and all senior claimants have already been paid (Kaufman, 1997b).
The authors state that the large losses borne by the FDIC with some bank failures since FDICIA
was enacted, including Superior Bank FSB, were due to supervisory forbearance--bank supervisors allowed banks to remain in business even when the institutions were not economically solvent.
To insure that banks are subject to market discipline, the terms of the debt should explicitly state and emphasize its junior status and the unde rstanding that the holder would not have access to a "rescue" under the too-big-to-fail systemic risk clause in FDICIA
The core elements of FDICIA
establish five capital categories for depository institutions: (1) well capitalized, (2) adequately capitalized, (3) undercapitalized, (4) significantly undercapitalized, and (5) critically undercapitalized.