Features of the Federal Deposit Insurance Corporation Improvement Act of 1991
Josh Sarna
Homework 2
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 subsidizes losses if the depository institution does not have assets valued high enough to cover insured depositors, therefore forcing losses onto uninsured depositors and equity holders.
a. What is the least-cost resolution (LCR) strategy?
The LCR strategy requires that every possible alternative that can be used in the case of a depository institution failure be valued using present values, and then choosing the solution that bears the least total cost.
b. When can the systemic risk exemption be used as an exception to the LCR policy of DI closure methods?
This exemption can only be used when systematic risk is evident, which means that the closure of the depository institution will have negative effects on the financial system as a whole.
c. What procedural steps must be taken to gain approval for using the systemic risk exemption?
Two thirds of the Federal Reserve board and FDIC board’s approval, and it must be recommended by the secretary of the treasury and the President.
d. What are the implications to the other DIs (Depository Institutions) in the economy of the implementation of this exemption?
The implementation of the systematic risk exemption forces all depository institutions to bear the cost of the bailout of
Homework 2
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 subsidizes losses if the depository institution does not have assets valued high enough to cover insured depositors, therefore forcing losses onto uninsured depositors and equity holders.
a. What is the least-cost resolution (LCR) strategy?
The LCR strategy requires that every possible alternative that can be used in the case of a depository institution failure be valued using present values, and then choosing the solution that bears the least total cost.
b. When can the systemic risk exemption be used as an exception to the LCR policy of DI closure methods?
This exemption can only be used when systematic risk is evident, which means that the closure of the depository institution will have negative effects on the financial system as a whole.
c. What procedural steps must be taken to gain approval for using the systemic risk exemption?
Two thirds of the Federal Reserve board and FDIC board’s approval, and it must be recommended by the secretary of the treasury and the President.
d. What are the implications to the other DIs (Depository Institutions) in the economy of the implementation of this exemption?
The implementation of the systematic risk exemption forces all depository institutions to bear the cost of the bailout of