445 Homework 2 Essays
1. What are some of the essential features of the FDICIA of 1991 with regard to the resolution of failing Depository Institutions?
The essential features of the FDICIA of 1991 with regard to failing depository institutions include making it difficult for a depository institution’s failure to be delayed, as long as systematic risk isn’t determined. Systemic risk is the risk of the failure of the depository institution affecting the entire financial system in a negative way. Along with this, FIDICIA requires the use of the least cost resolution strategy, which requires a resolution to be based on present value, and have the least cost to the FDIC and the depository institution. Also, under FIDICIA, the FDIC only …show more content…
Under the insured depositor transfer method; insured depositors and the FDIC have no loss. The bank has assets valued high enough to cover all of its insured deposits so the FDIC does not have to subsidize a loss. Uninsured depositors have a loss of 25 million. 60 million of the 70 million of assets go to insured depositors, and then the remaining 10 million is given to uninsured depositors resulting in a 25 million dollar loss. Equity holders receive nothing from the LCR.
3. What is moral hazard? How did the fixed-rate deposit insurance program of the FDIC contribute to the moral hazard problem of the savings association industry? What other changes in the savings association environment during the 1980s encouraged the developing instability of the industry?
Moral hazard is a feeling of safety for a savings association because of the promise of insurance on deposits. It causes banks to allow for greater risks than they normally would allow for because of the idea of a safety net provided by the FDIC if anything bad were to happen. The fixed-rate deposit insurance program of the FDIC contributed to the moral hazard program because when interest rates were