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Numbers in the text and tables may not add to totals because of rounding. Cover photo shows a run on a bank in New York City in 1987 (The Bettmann Archive). |
Since the Banking Act of 1933 established the Federal Deposit Insurance Corporation, the FDIC has resolved about 2,000 banks. More than 1,000 of these resolutions occurred in the six years between 1987 and 1992. The dramatic increase in the number and costs of resolutions in this period, coming on the heels of the savings and loan crisis, raises questions about the long-term condition of the banking industry and the Bank Insurance Fund.
This study, which was prepared in response to a request from the Senate Committee on Banking, Housing, and Urban Affairs, examines major factors contributing to bank failures during this six-year period and why these failures resulted in such extraordinary resolution costs. It examines bank-specific factors such as asset quality and portfolio composition, as well as more general structural and economic conditions affecting the industry. In keeping with the mandate of the Congressional Budget Office (CBO) to provide objective analysis, this study makes no recommendations.
Patrice L. Gordon and Thomas Lutton (currently at the Office of the Comptroller of the Currency, Bank Research Division) wrote the study, under the supervision of Jan Paul Acton and Elliot Schwartz of CBO's Natural Resources and Commerce Division. Aaron Zeisler, Michael Crider, and Veronica French provided research assistance. Kim Kowalewski, Bruce Vavrichek, Robin Seiler, Jim Hearn, Mark Booth, and Ron Feldman of CBO offered comments and helpful suggestions. The authors wish to thank George Kaufman, George French, James Thompson, James Earth, R. Dan Brumbaugh, Robert Litan, Philip F. Bartholomew, Larry Mote, Harold A. Black, and Haluk Unal for their constructive comments.
Sherwood D. Kohn edited the manuscript, and Christian Spoor provided
editorial assistance. Gwen Coleman and Angela Z. McCollough produced the
numerous drafts. With the assistance of Regina Washington and Martina Wojak-Piotrow,
Kathryn Quattrone prepared the study for publication.
Robert D. Reischauer
Director
June 1994
SUMMARY
ONE - INTRODUCTION
TWO - THE STRUCTURAL TRENDS AND ECONOMIC CONDITIONS UNDERLYING BANK RESOLUTIONS
THREE - THE ROLE OF MANAGEMENT AND INSTITUTION-SPECIFIC FACTORS ASSOCIATED WITH RESOLUTIONS
FOUR - BANK RESOLUTIONS AND THE COSTS OF RESOLUTION
FIVE - AN INDUSTRY OUTLOOK: GUARDED OPTIMISM
APPENDIXES
A - Methods of Evaluating the Financial Condition of Banks
B - Types of Resolutions: Data on Resolution Costs and Bank Resolutions
C - A Simulation of Embedded Costs
| TABLES | |
| 1. | Resolutions by the Federal Deposit Insurance Corporation, by Region, 1987-1992 |
| 2. | The Incidence of Five Areas of Weakness That Figured Prominently in the Decline of National Banks Between 1979 and 1987 |
| 3. | Internal Management Factors Contributing to the Failure of National Banks Resolved Between 1979 and 1987 |
| 4. | A Comparison of Portfolio Characteristics of Small Resolved and Surviving Banks, 1987-1989 |
| 5. | Assets, Capitalization, and Profitability: A Comparison of Historical Characteristics of Small Resolved and Surviving Banks, 1987-1989 |
| 6. | Assets and Capitalization: A Comparison of Annual Growth Rates of Small Resolved and Surviving Banks, 1987-1989 |
| 7. | Average Equity-to-Asset Ratios of Banks Before Resolution by the Federal Deposit Insurance Corporation, 1987-1992 |
| 8. | Assets and Resolution Costs of Resolved Banks, Grouped by Size, 1987-1992 |
| 9. | An Analysis of Banks and Bank Assets Insured by the Federal Deposit Insurance Corporation, Grouped by Capitalization Ratios and Asset Size, 1986 and 1992 |
| 10. | Assets and Resolution Costs of Resolved Banks, Grouped by Size, 1992 and 1993 |
| B-1. | Summary Statistics for Banks Resolved by the Federal Deposit Insurance Corporation, by Type of Resolution, 1987-1992 |
| B-2. | Number of Banks Resolved by the Federal Deposit Insurance Corporation, by Year and Type of Resolution, 1987-1992 |
| B-3. | Resolution Costs as a Percentage of Assets for Banks Resolved by the Federal Deposit Insurance Corporation, by Year and Type of Resolution, 1987-1992 |
| B-4. | Average Asset Size of Banks Resolved by the Federal Deposit Insurance Corporation, by Year and Type of Resolution, 1987-1992 |
| B-5. | Total Assets of Banks Resolved by the Federal Deposit Insurance Corporation, by Year and Type of Resolution, 1987-1992 |
| B-6. | Resolution Costs of Banks Resolved by the Federal Deposit Insurance Corporation, by Year and Type of Resolution, 1987-1992 |
| C-1. | A Five-Year Profile of Some Average Financial Characteristics of Banks Resolved in 1990 |
| C-2. | Resolution Costs and Estimated Embedded Losses Using Average Characteristics of 1990 Resolutions |
| C-3. | Three Simulated Cases Involving Embedded Losses on Assets Using Average Characteristics of 1990 Resolutions |
| FIGURES | |
| 1. | Average Annual Number of Bank Failures for Selected Periods Between 1900 and 1992 |
| 2. | Number of Bank Resolutions, 1934-1992 |
| 3. | Average Resolution Costs for Resolved Banks, 1934-1992 |
| 4. | Composition of Commercial and Savings Bank Liabilities, 1960-1992 |
| 5. | Composition of Commercial and Savings Bank Loans and Leases, 1960-1992 |
| 6. | Distribution of Resolved Banks Grouped by Ratios of Resolution Costs to Bank Assets, 1987-1992 |
| 7. | Distribution of Resolved Banks Grouped by Equity-to-Asset Ratios, Observed at the End of Year Before Resolution, 1987-1992 |
| BOXES | |
| 1. | The Basics of Bank Regulation and Examination |
| 2. | An Actuarial Framework: Mortality Rates Based on Capitalization and Asset Size |
This document is available in its entirety in PDF.