Introduction to Finance

Dodd-Frank Wall Street Reform 
and Consumer Protection Act 
of 2010 
promotes stability in the 
fi nancial system by improving 
accountability and transparency, 
and provides increased consumer 
protection

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C H A PT E R 3 Banks and Other Financial Institutions
The Federal Savings and Loan Insurance Corporation (FSLIC) had insured the deposits 
of most S&L depositors since the early 1930s. However, because of the number and size of the 
S&L failures, the FSLIC was bankrupt by early 1988. As a result, the 
Financial Institutions 
Reform, Recovery, and Enforcement Act
(FIRREA) was passed in 1989. FIRREA provided for 
the termination of the FSLIC and the formation of the Savings Association Insurance Fund 
(SAIF). Also, the Offi
ce of Thrift Supervision (OTS) took over the regulation of S&Ls from 
the Federal Home Loan Bank Board (FHLBB). The act also required S&Ls to commit more of 
their assets to home loans, restricted S&Ls from holding junk bonds, and allowed commercial 
banks to purchase S&Ls.
Congress created the Resolution Trust Corporation (RTC) in 1988 to take over and dis-
pose of the assets of failed associations by fi nding acquirers or through liquidations. For some 
failed S&Ls, deposit transfers were made to sound organizations for a fee without requiring 
the assumption of any of the defunct S&L’s poor-quality assets. Some risky assets of failed 
S&Ls, such as junk bonds, were purchased at deep discount prices by the RTC and later 
resold. Assets of failed S&Ls that acquiring fi rms did not want were disposed of by the RTC. 
Congress shut down the RTC in 1995. 
Commercial banks have suff ered some of the same diffi
culties as the S&Ls. However, 
losses from international loans, agricultural loans, and from loans to the petroleum industry 
have been more signifi cant for commercial banks—many banks had to be merged with other 
banks. Savings banks and credit unions experienced some diffi
culties as well but to a lesser 
extent.
Protection of Depositors’ Funds
As a result of bank “runs,” caused by many depositors trying to retrieve their deposited funds 
at the same time during the late 1920s and early 1930s, insurance protection laws for deposits 
at depository institutions were passed to restore the confi dence of depositors. The Federal 
Deposit Insurance Corporation (FDIC) was created in 1933 to protect deposits in banks. This 
was followed by federal legislation that created the Federal Savings and Loan Insurance Cor-
poration (FSLIC) and the National Credit Union Share Insurance Fund (NCUSIF) to protect 
deposits in S&Ls and credit unions, respectively. Of course, as previously noted, the S&L 
crisis of the 1980s led to the insolvency of the FSLIC and its replacement with SAIF, which 
is now the insuring agency for S&Ls. Over the years the limitation on deposit account insur-
ance was increased until by 1980 it was set at $100,000 per account. Today, deposit account 
insurance is $250,000 per account. 
The pool of funds available to the FDIC for covering insured depositors is called the 
Bank 
Insurance Fund
,
 
which collects annual insurance premiums from commercial banks. Prior to 
1991, all banks paid the same premium rate on their deposits. Thus, riskier banks were being 
subsidized by safer banks. The 
Federal Deposit Insurance Corporation Improvement Act of 
1991 (FDICIA)
was enacted, in part, to address this problem. The FDICIA provided for diff er-
ences in deposit premiums based on the relative riskiness of banks. 
One of the special problems of insuring bank losses has been the practice and assump-
tion that some banks are “too big to fail”; too big in the sense that the problems created by 
losses may extend far beyond the failed bank. It is on this basis that depositors have typically 
received 100 percent coverage of their funds even though coverage of only the fi rst $250,000 
deposited is guaranteed by law. This practice tended to reduce the incentive for large depositors 
to exercise market discipline and created an incentive for large deposits to be shifted to “too 
big to fail” banks. Congress addressed this issue with the FDICIA, which generally requires 
that failed banks be handled in such a way as to provide the lowest cost to the FDIC. Limited 
exceptions, however, were provided if very serious adverse eff ects on economic conditions 
could be expected as a result of failure of big banks.
There is little doubt that deposit insurance will continue to exist. It is also obvious that 
changes will have to be made if we are to avoid future burdens on taxpayers resulting from 
deposit insurance programs. Suggestions for solving these problems include eliminating all 
deposit insurance, reducing insurable deposits limits to protect only the small deposits, levy-
ing higher premiums on depository institutions for the insurance, and having more strict reg-
ulatory and supervisory control.

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3.6 Structure of Banks