L. William Seidman, former chairman of the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation (RTC), mentioned in September of 1996 that “the banking problems of the 80s and 90s came primarily, but not exclusively, from unsound real estate lending.” He added, “the critical catalyst causing the institutional disruption around the world can be almost uniformly described by three words: real estate loans.” To read the entire report, click on Lessons of the Eighties: What Does the Evidence Show?. To view the entire symposium, click on History of the 80s: Volume II: Symposium Proceedings, January 16, 1997.
Alan Greenspan, former chairman of the Board of Governors of the Federal Reserve System, in a prepared statement to the U.S. Congress in April 2002 mentioned the following:
- Because of deposit insurance (FDIC), “the market discipline to control risks that insured depositors would otherwise have imposed on banks and thrifts has been weakened. Relieved of that discipline, banks and thrifts naturally feel less inhibited from taking on more risk than they would otherwise assume. No other type of private financial institution is able to attract funds from the public without regard to the risk it takes with its creditors’ resources. This incentive to take excessive risks is the so-called moral hazard problem of deposit insurance, the inducement to take risk at the expense of the insurer.”
- Current law allows the FDIC to raise premiums when it does not have enough insurance reserves and to lower, or eliminate premiums, when it has excess insurance reserves. “These requirements are clearly procyclical, lowering or eliminating fees in good times when bank credit is readily available and deposit insurance fund reserves should be built up, and abruptly increasing fees sharply in times of weakness when bank credit availability is under pressure and deposit fund resources are drawn down to cover the resolution of failed banks.”
- The “Board rejects the notion that any bank is too big to fail.”
- Consistent with this view, the market clearly believes that large institutions are not too big for uninsured creditors to take at least some loss. Spreads on large bank subordinated debt are wider than spreads on similar debt of large and highly rated nonbank financial institutions. Indeed, there are no AAA-rated U.S. banking organizations.”
To read the entire statement, click on Oversight Hearing on “The Federal Deposit Insurance System and Recommendations for Reform.”
The Gramm-Leach-Bliley Act passed into law on November 12, 1999. Some of the provisions of the act follows:
- Repeals the restrictions on banks affiliating with securities firms contained in sections 20 and 32 of the Glass-Steagall Act
- Allows banks to continue to be active participants in the derivatives business for all credit and equity swaps (other than equity swaps to retail customers)
To read the entire Glass-Steagall Act, also known as The Banking Act of 1933, signed into law during the Great Depression, click on Banking Act of 1933.
The Commodity Futures Modernization Act passed into law on December 21, 2000. Some of the provisions of the act follows:
- Excludes specified banking products and swap agreements from Commodity Futures Exchange Commission coverage.