Resolving Large Bank Failures

GAO discussed issues associated with resolving large bank failures. GAO noted that: (1) the problems and incentives associated with resolving large bank failures show the need for comprehensive reform of the deposit insurance and bank supervisory systems; (2) any attempts to increase depositor discipline must be preceded by other reforms to improve the safety and soundness of banking operations; and (3) scaling back coverage for insured deposits or eliminating de facto protection for uninsured deposits would not be wise, since the potential for systemic instability was too high. In addition, GAO noted that recommended reforms to control the ability of banks to attract deposits, while at the same time maintaining market stability, included: (1) improving supervision; (2) strengthening capital requirements to discourage bank owners and managers from taking excessive risks and to provide a financial buffer; (3) developing disclosure requirements; (4) creating a risk-based deposit insurance system to supplement risk-based capital requirements; and (5) providing uninsured depositors with the choice of insuring their deposits at an additional cost. GAO also noted that: (1) in the longterm, the recommended reforms could place uninsured depositors at greater risk; and (2) requiring the industry to pay for large bank failures through its Bank Insurance Fund premiums would create powerful incentives for the industry to pressure the Federal Deposit Insurance Corporation to effectively deal with problems in large banks.