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									“Analysis of Federal Deposit Insurance Corporation (FDIC) And the Bank Failure Rate”
Heather Squires

FDIC 1933- Present
Established in the Banking Act of 1933 as a result of bank panics during the Great Depression  Today: “FDIC supervises banks, insures deposits up to $100,000 and helps maintain a stable and sound banking system” (FDIC Website)
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Why?
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Bank Failures during the 1980’s were caused by the FDIC, or were they?
Incentives towards risk~ Moral Hazard  Who pays?  FDICIA in 1991
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Previous Research
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Barth and Brumbaugh (early 1990’s)
Claimed the FDIC caused the increase in bank failure as a result of insurance rising from $40,000 to $100,000  FDIC led to a “heads I win, tails the federal insurer loses”  Concluded bank failures were a result of the federal deposit insurance
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More Research
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Cebula and Belton (1997)
Follow-Up study on the effects of the FDICIA  Again found FDIC was a major component of bank failures  Determined FDICIA had directly decreased the bank failure rate
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Still More Research
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Saltz (He had to be different)
Didn’t agree with the previous researchers and did it his way  Cointegration technique, eigenvalues, trace effects~ TOO MUCH CALCULUS!  What did he find after all of that work?
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 The

SAME thing~ FDIC caused bank failures during the 1980’s

My Model
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A simple linear regression

BFRt  x0  x1 FDICt 2  x2COSTt 2  x3CARt 2  x4 3Yeart 2  x5GDPt 1  u
x0 BFRt FDICt  2 COSTt  2 CARt  2 3Yeart  2 GDPt 1 u  the constant term  the percentage of federally insured banks in year t that were closed or merged  the extent of federal insurance coverage in year t  2 = the real average cost of deposits at commercial banks in year t  2 = the equity capital-to-total asset ratio in year t  2 = the real average interest rate for a three-year Treasury bill in year t  2 = the percentage growth of real GDP for year t  1 = the error term

Results
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1981-1991
BFRt  10.223  0.188 FDICt 2  0.0403COSTt 2  2.047CARt 2 (6.52) (0.822) (0.195) (2.045) 0.0742(3Yeart 2 )  .0038GDPt 1  .3230 (1.101) R 2  0.85 (.0677)

More…
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1981-2005
BFRt  4.375  0.050 FDICt 2  0.2736COSTt 2  0.457CARt 2 (1.306) (0.1743) (0.092) (0.134) 0.3141(3Yeart 2 )  .0329GDPt 1  .3092 (0.0709) R 2  0.74 (.0403)

Finally…
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1992-2005

BFRt  1.999  0.1351FDICt 2  0.1604COSTt 2  0.2038CARt 2 (0.967) (0.1102) (0.0436) (0.108) 0.1284(3Yeart 2 )  .0274GDPt 1  .0672 (0.0512) R 2  0.97 (.01511)

Did the FDICIA work?
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Bank failure rates have decreased
Bank Failure Rate
1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004

Conclusions
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Since 1991 the bank failure rate has decreased significantly
Economic Boom  Low Interest Rates  Higher Capital to Asset Ratios
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What’s Next?
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Federal Deposit Insurance Improvement Act of 2005
Removed all restrictions on imposing risk-based premiums  Now insures up to $250,000 for retirement accounts
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Questions?


								
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