The Reform of Federal Deposit Insurance.

• Author: Cebula, Richard J.

The editors of this outstanding book of analyses, James Barth and Dan Brumbaugh, are well known scholars who have both made a number of highly significant contributions to the fields of economics and finance. With this book of ten articles plus an Introduction, Barth and Brumbaugh once again provide us an extraordinary substantive contribution, in this instance to the furthering of our knowledge of the very timely and significant issue of federal deposit insurance and its reform.

Joseph Stiglitz provides a brief Introduction to the book in which he stresses that the S&L debacle has been the predictable outcome of a seriously flawed incentive structure that is built into the federal deposit insurance system. He points out that the S&L crisis has become an economic tragedy for the country but a triumph for economic analysis, which accurately predicted the actual course of events.

In the first essay, Charles Calomiris argues that the moral hazard problem and other problems that arise in government-controlled deposit-insurance systems are likely to be observably more pronounced in the current federal deposit insurance system than in the earlier state programs that have been examined. Calomiris argues that the most desirable means by which to achieve banking system stability is to permit unlimited branch banking combined with the type of privately administered formal deposit insurance programs of antebellum Indiana, Ohio, and Iowa.

In the second essay, James Barth and Philip Bartholomew argue convincingly that the major culprit in the S&L crisis is the existing structure of the federal deposit insurance system. They take the view that the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) was seriously flawed for its failure to adequately restructure the federal deposit insurance system. The authors observe that the need for reform of the federal deposit insurance system is based upon the perspective that although the system protected the small depositor and prevented widespread runs in the 1980s, it failed to sufficiently protect the taxpayer. The authors argue that all insolvent institutions must be closed or reorganized in a timely and cost-effective manner or else the losses from insolvencies will be excessive and burdensome to the taxpayers. Other reforms discussed include the use of risk-based insurance premiums or a system of co-insurance. The authors also discuss a variety of still other possible reforms, the theme...