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Economic Brief

June 2015, No. 15-06

Did Banking Reforms of the Early 1990s Fail? Lessons from Comparing Two Banking Crises

Eliana Balla, Helen Fessenden, Edward S. Prescott and John R. Walter

New Richmond Fed research on community and midsize banks evaluates the Federal Deposit Insurance Corporation Improvement Act (FDICIA) and Basel I by comparing failures in the 1986-92 period to those in 2007-13. Banks greatly increased commercial real estate lending between the two banking crises, but higher capital mitigated this risk. Failure rates in the recent crisis were mainly driven by the severity of the economic shocks. However, higher capital did not help contain FDIC losses, which were much larger in the recent crisis. One possible explanation is limitations in the accounting triggers used by FDICIA's prompt corrective action requirement.

Additional Resources

Balla, Eliana, Edward Simpson Prescott, and John R. Walter, "Did the Financial Reforms of the Early 1990s Fail? A Comparison of Bank Failures and FDIC Losses in the 1986-92 and 2007-13 Periods," Federal Reserve Bank of Richmond Working Paper No. 15-05, May 2015.

Walter, John R., "Closing Troubled Banks: How the Process Works," Federal Reserve Bank of Richmond Economic Quarterly, Winter 2004, vol. 90, no. 1, pp. 51-68.

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