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  • FDIC Fixes Improve Rescue's Effectiveness

    It appears that the Senate is already on the road to improving the financial rescue package that the House of Representatives rejected earlier this week. The biggest change in the Senate version of the bill is an increase in FDIC insured deposits, which would rise to $250,000 from $100,000. This is a good first step but more changes are needed:

    • First, not only should Congress raise the level of deposits covered by FDIC to $250,000, the FDIC should be given the emergency authority to suspend the cap completely. This step will increase the confidence of larger depositors.
    • Second, the FDIC needs more assets. The 1991 Federal Deposit Insurance Corporation Improvement Act (FDICIA) allows unlimited Treasury advances to FDIC if 2/3 of both the FDIC and Fed boards and the Secretary of the Treasury certify that the action is necessary for stability. This section has already been invoked for the Wachovia takeover. Congress should reinforce this message with language making it clear that it stands behind this declaration. Such a move would further increase public confidence in the banks insured by the agency.
    • Finally, the FDIC should make clear by a public statement that it is willing to do more ‘open bank’ takeovers like Wachovia’s where both insured and uninsured depositors can remain whole. FDIC will need to make it clear that such a takeover will only happen in special cases to avoid moral hazard. Congress should explicitly support temporarily moving back to open bank solutions in legislation.
    Posted in Economics [slideshow_deploy]

    2 Responses to FDIC Fixes Improve Rescue's Effectiveness

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