Banking Review 

2006 VOLUME 18, NO. 2 

The Liability Structure of FDIC-Insured Institutions: 

Changes and Implications (page 1) 

by Christine M. Bradley and Lynn Shibut 

As asset growth has outstripped core deposit growth in recent years, banks have adapted their funding 

strategies. This article describes the changes that have occurred, discusses possible future changes in 

bank liability structure, and explores the regulatory issues related to these changes (including the 

areas of market discipline, liquidity risk examination, deposit insurance, and failure resolution). 

The Resolution Trust Corporation and Congress, 1989–1993 

PART I: 1989–90 (page 38) 

by Lee Davison 

This is the second of two Banking Review articles on the legislative history of the Resolution Trust 

Corporation. The legislative history of the establishment of the RTC, “Politics and Policy: The 

Creation of the Resolution Trust Corporation,” appeared in Banking Review 17 No. 2 (2005). The 

continuation of that legislative history, covering the years 1989–1993, is presented in two parts: 

Part I appears here; Part II will follow in an upcoming issue. 

The views expressed are those of the authors and do not necessarily reflect official positions of the Federal Deposit Insurance 

Corporation. Articles may be reprinted or abstracted if the FDIC Banking Review and author(s) are credited. Please provide the 

FDIC’s Division of Insurance and Research with a copy of any publications containing reprinted material. 

Chairman Sheila C. Bair 

Director, Division of Insurance Arthur J. Murton 

and Research 

Deputy Director Donald Inscoe 

Managing Editor Jack Reidhill 

Editorial Committee Christine E. Blair 

Valentine V. Craig 

Rose M. Kushmeider 

Publication Manager Geri Bonebrake 
The Liability Structure of FDIC-Insured
 

Institutions: Changes and Implications
 

by Christine M. Bradley and Lynn Shibut* 

Depository institutions have traditionally looked 

to deposits to fund their asset growth. But since 

1978, the value of bank assets has increased proportionally much more than the value of bank 

deposits: between 1978 and 2005 the value of 

assets held in commercial banks insured by the 

Federal Deposit Insurance Corporation (FDIC) 

rose by nearly 500 percent, but total deposits held 

by these same institutions increased by only 393 

percent. And between 1978 and 2005, the percentage of U.S. banks that were able to fund at 

least two-thirds of their total assets with core 

deposits fell from nearly 91 percent to 59 

percent.1 In addition to core deposits shrinking, 

banks are facing increased interest costs since 

bank customers are reacting to higher interest 

rates and moving their money out of lower-yielding bank accounts and into certificates of deposit 

and other higher-paying accounts. As a result of 

these developments, bank liability management 

demands more attention today than it did just a 

few years ago. 

In Part 1 of this article we focus on the changes 

in bank liability structure, and in Part 2, on the 

implications of the changes for regulators. Part 1 

describes the events that led to the decrease in 

banks’ reliance on deposits, examines the changes 

banks made to their liability management in 

response, and discusses the possible future of these 

changes. Part 2 looks at the possible effects of the 

changing bank liability structure on market discipline, liquidity risk examination, deposit insurance pricing, and failure resolution (domestic 

depositor preference and operational issues). 

PART 1. Changes in Bank Liability Structure 

In this section of the paper we survey the past, 

the present, and the possible future of banks’ liability structure. We explain some of the wholesale funding options available to banks and 

describe other choices that bankers have available 

in their nondeposit liability management. We 

* The authors are in the Division of Insurance and Research at the Federal 

Deposit Insurance Corporation. Christine Bradley is a senior policy analyst and 

Lynn Shibut is the chief of the Corporate Consulting Services Section. The 

views expressed here are those of the authors and do not necessarily reflect 

the views of the Federal Deposit Insurance Corporation. The authors would 

like to thank Timothy Critchfield, Timothy Curry, Andrew Davenport, Joseph 

Fellerman, Warren Heller, Mike Jenkins, Michael Krimminger, James Marino, 

Kathleen McDill, Chris Newbury, Dan Nuxoll, Munsell St. Clair, and Mark 

Vaughan for their helpful comments, and Tyler Davis, Aja McGhee, and Emily 

Song for research assistance. All errors and omissions are their own. 

1 Core deposits are estimated as total deposits minus brokered deposits and 

other time deposits that are in denominations greater than $100,000. 

FDIC BANKING REVIEW 1 2006, VOLUME 18, NO. 2 
 

The Liability Structure of FDIC-Insured Institutions 

observe how the tools bankers choose are driven 

by developments in the financial marketplace, as 

well as existing legal constraints. We also take a 

look at the liquidity risk facing today’s banker. 

Historical Overview 

For 45 years after the Great Depression, the business of banking was largely a process of collecting 

deposits from people and businesses and loaning 

the same funds to other people and businesses 

having credit needs. A bank’s success greatly 

depended on a depositor’s willingness to accept a 

rate of interest lower than the rate the borrower 

paid for use of the funds. But in the mid-1970s 

money-market rates rose above the rates that 

depository institutions were authorized to pay on 

their time deposits,2 and by 1979 the savings patterns for U.S. households were affected by that 

differential in rates: in 1978, U.S. households 

held $100.4 billion in time and savings deposits, 

but by year-end 1979 that amount had fallen to 

$71.2 billion. Similarly, in 1978 U.S. households 

had $5.7 billion in money market fund shares, but 

at the end of 1979 the figure had increased to 

$30.5 billion.3 Figure 1 shows how the percentage of financial assets of households held by banks 

and thrifts fell from the mid-1980s until 1999, the 

year the U.S. stock market hit record levels. The 

chart further shows that as the stock market 

retrenched beginning in 2000, depositors again 

sought the safety provided by a bank deposit. 

Figure 1 

In the early 1980s, legislative reforms and technological advances became two-edged swords to 

bankers seeking to increase their deposits. Chief 

among the legislative changes during this period 

were the lifting of intrastate banking restrictions 

and the deregulation of interest rates paid on 

deposit accounts. But these legislative reforms, 

which were intended to give depository institutions tools to compete with the money market for 

deposits, also resulted in increased competition 

among banks by allowing bankers to go outside 

their local market to procure deposits. In addition, technological advances that created new 

delivery channels and increased efficiencies for 

bankers also made it easier for depositors to leave 

their local markets for better terms. With core 

deposits dropping as a percentage of total assets, 

bankers recognized that they would need to 

increase their reliance on managed liabilities to 

fund domestic credit, while managing liquidity 

risk (see figure 2). 

2 After the banking crisis of the 1930s, interest-rate ceilings were imposed on 

commercial banks to protect banks, both by holding the institutions’ cost of 

funds below their return on assets and by restraining competition within the 

industry. Interest-rate ceilings did not apply to savings and loan associations 

(S&Ls) until 1966. 

3 Federal Reserve Board of Governors (2006), chart B.100. 

Figure 2 

1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 

0 

5 

10 

15 

20 

25 

30 

Percentage of Total Financial Assets 

0 

2,000 

4,000 

6,000 

8,000 

10,000 

12,000 

14,000 

Dow Jones Average 

Dow Jones Average 

Checkable Deposits & Currency 

Time & Savings Deposits 

Source: Flow of Funds, Federal Reserve Board. 

Financial Assets of Households and

Stock Market Performance

1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 

0 

10 

20 

30 

40 

50 

60 

70 

80 

90 

100 

Percentage of Total Liabilities 

Small Time & Savings Deposits 

Large Time Deposits 

Checkable Deposits 

Source: Flow of Funds, Federal Reserve Board. 

Bank and Thrift Deposits

2006, VOLUME 18, NO. 2 2 FDIC BANKING REVIEW 
The Liability Structure of FDIC-Insured Institutions 

New Funding Trends 

When deposits lagged behind loan growth in the 

1990s, some bankers argued that there was a funding crisis.4 And indeed, managing bank liquidity 

is not as easy as it once was. However, calling it a 

crisis gives short shrift to the funding options 

available to banks. Now both small and large 

banks regularly use wholesale sources and ratesensitive deposits as part of their funding strategy. 

By wholesale sources, we mean borrowings (such 

as federal funds, repurchase agreements, and Federal Home Loan Bank [FHLB] advances) as well 

as brokered deposits. Bankers have also developed methods of avoiding existing regulations 

that result in an increase in the bottom line 

(sweep accounts and international banking facilities). The many products available have much to 

offer banks, but they often entail more risk and 

require a more sophisticated management strategy. Thus even though management of liquidity 

has become more complex, it is by no means 

impossible. 

Federal Home Loan Bank Advances 

Congress established the FHLB system in 1932 to 

facilitate the extension of mortgage credit by providing thrift institutions with collateralized 

loans.5 In 1989 the Financial Institutions, 

Reform, Recovery, and Enforcement Act 

(FIRREA) expanded the role of the FHLB system 

by opening its membership to commercial banks 

and credit unions, and in 1999 the GrammLeach-Bliley Act expanded the type of assets that 

qualify as collateral for FHLB advances. Between 

year-end 1992 and year-end 2005, the number of 

commercial banks in the FHLB system grew from 

1,284 to 5,927. As of December 2005, the FHLB 

system had 8,157 members.6 Although the FHLB 

system does not interact directly with U.S. households, the system has enhanced the availability of 

residential mortgages by providing member institutions with a way to liquefy the home mortgages 

they originate, thus ensuring the flow of available 

credit. 

Some critics of the FHLB system have suggested 

that FHLBs are no longer necessary because of 

the growth and strength of the secondary mortgage market.7 But the FHLB system has done 

more than help its members fund mortgage loans. 

The FHLB system also offers products that help 

members in their asset-liability management, and 

it generally provides a supplementary source of 

funds for expansion and liquidity that can address 

imbalances between deposits and funding needs.8 

There is no indication that the role of FHLBs in 

providing a reliable source of bank funding will 

change in the future. But critics argue that FHLB 

advances enable banks to evade the natural limits 

of their expansion and that the advances thereby 

impede market discipline; thus, any future 

changes to the FHLB’s role in liquidity management may well take the form of restrictions on 

the use of FHLB advances.9 An additional impetus for limiting the use of FHLB advances is the 

effect these advances can have on the deposit 

insurance fund when an insured depository institution fails: because all FHLB advances are 

required by law to be secured, they are paid in full 

before the FDIC recovers funds after an insured 

institution fails.10 

Nonetheless, FHLB advances are very popular 

with bankers (for the ten years ending December 

31, 2002, FHLB advances increased by 521 percent) and are likely to remain an important funding tool, possibly with limitations placed on their 

use by troubled institutions.11 

4 For example, see Garver (2000), Jackson (2001), and Silverman (2001a, 

2001b).
 

5 The FHLB system is a government-sponsored enterprise (GSE) consisting of
 

12 banks that raise funds by issuing consolidated debt securities in the capital markets.
 

6 http://www.fhlb-of.com/mission/membership_frame.html. This includes credit unions and insurance companies as well as banks and savings institutions.
 

7 See, for example, Congressional Budget Office (1993).
 

8 Another benefit of FHLB advances is that the FHLB system is willing to
 

make both fixed and adjustable-rate advances that can have maturities ranging
 

from one day to 20 years, whereas most other funding sources do not offer
 

long-term maturities. (FHLBs also provide their members with funding for
 

small businesses, community development, and rural and agricultural loans.)
 

9 See Stojanovic, Vaughan, and Yeager (2000); Ashley, Brewer, and Vincent
 

(1998); and Bennett, Vaughan, and Yeager (2005). Concerns about the
 

growth of FHLBs have resulted in a proposal by the Federal Housing Finance
 

Board to significantly raise retained earnings held by the FHLBs. See Rucker
 

(2006).
 

10 See Shibut (2002).
 

11 Dow Jones Capital Market Report (2000). See the section below (in Part
 

2) on market discipline. 

FDIC BANKING REVIEW 3 2006, VOLUME 18, NO. 2 
The Liability Structure of FDIC-Insured Institutions 

Brokered Deposits 

A second funding substitute for core deposits is 

brokered deposits, generally defined as deposits 

“issued by a financial institution and purchased by 

an investor through a third-party intermediary.”12 

Brokered deposits were used as far back as the 

1950s to aid the thrift industry whenever there 

was a regional shortfall of funds. Before 1970, the 

brokered-deposit market consisted primarily of 

institutional uninsured depositors, including 

money-market funds, corporations, bank trust 

departments, and insurance companies. In 1973, 

when interest-rate ceilings were eliminated on 

deposits of $100,000 or more, deposit brokers 

helped institutional investors find the highest 

rates available for their deposits, while technological advances made a nationwide market possible. 

But in 1974, an FDIC study indicated that a misuse of brokered funds was a contributing factor to 

many of the bank failures.13 

In the early 1980s, the thrift industry used brokered deposits to fund much of its growth. 

Between 1980 and 1983, brokered deposits within 

that industry grew by a yearly average of 60 percent. It was during this period that the deposits 

gained much of their notoriety, and many people 

concluded that brokered deposits contributed to 

the savings and loan crisis. In 1984 regulators 

attempted to curb the use of brokered deposits, 

and from 1984 through 1989 brokered deposits 

held by savings and loans increased an average of 

only 4.27 percent per year.14 Although the use of 

brokered deposits is most often associated with 

the thrift industry, commercial banks also found 

that brokered deposits met their funding needs. 

At the end of 1990, commercial banks had $72.6 

billion in brokered deposits.15 

By 1989 Congress had concluded that brokered 

deposits contributed significantly to the collapse 

of the savings and loan industry and began 

restricting their use.16 Congress adjusted the 

restrictions in 1991 by prohibiting any insured 

institution that is not well capitalized from 

accepting any funds obtained directly or indirectly from a deposit broker. Institutions that are 

“adequately capitalized” can apply to the FDIC 

for a waiver of this provision on a case-by-case 

basis.17 

People on the periphery of the banking industry 

might have concluded that brokered deposits 

would never again be thought of as a conventional source of funding. But brokered deposits have 

again become one of the tools bankers use in 

their liability management programs. In fact, as 

figure 3 shows, large banks’ use of brokered 

deposits has exploded in recent years. From a 

bank’s perspective, brokered deposits can be used 

to great advantage because they do not upset a 

bank’s local savings market and they give the 

institution access to national markets: banks can 

12 FDIC (1997), 119.
 

13 Hill (1974). The study found that a misuse of brokered deposits contributed
 

to 30 percent of failures from 1960 to 1974. But regulators had expressed
 

concerns even before this study was released. In 1959 the Federal Home
 

Loan Bank Board (FHLBB) limited the percentage of brokered money that a
 

thrift could accept to 5 percent of its total deposits. The limitation was
 

repealed in 1981.
 

14 The 1980–1983 growth is documented in FHLBB (1980, 1983, 1984a). The
 

1984–1989 growth is documented in FHLBB (1984b, 1989). The FHLBB and
 

the FDIC issued a joint regulation that would have limited deposit insurance
 

on any deposits placed by brokers (49 Fed. Reg. 13,003 [1984]), but when
 

the agencies were challenged in federal court, the court rejected their action
 

(FAIC Sec., Inc. v. U.S., 595 F. Supp. (D.D.C. 1984), aff’d mem., 753 F.2d 166
 

(D.C. Cir. 1985)).
 

15 Cope (1991).
 

16 12 U.S.C. section 1831(f) (2001).
 

17 Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
 

section 301, as codified in 12 U.S.C. § 1831f (2001). The capital categories
 

are statutorily defined (12 U.S.C. §1831o(b)(2001)).
 

Figure 3 

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 

0 

100 

200 

300 

400 

500 

$ Billion 

Large Banks 

Small Banks 

Source: Call Reports, FDIC. 

Note: Large banks are defined as those with assets over $1 billion. 

Brokered Deposits at Banks and Thrifts

2006, VOLUME 18, NO. 2 4 FDIC BANKING REVIEW 
The Liability Structure of FDIC-Insured Institutions 

have one rate structure for local deposits and 

another for deposits placed through brokers. 

Additionally, because institutions that specialize 

in commercial lending are limited in their ability 

to borrow from FHLBs,18 such institutions find 

brokered deposits particularly beneficial. 

Two forms of brokered deposits that bank managers use for liability management in today’s market are deposit splitting, used mainly by large 

banks, and an Internet-based service, used mainly 

by small and midsize banks. Other sources of brokered deposits exist as well—for example, less-formal deposit-splitting arrangements, online 

auctions, and deposit-listing services19—but are 

not discussed here. However, their availability is 

a reminder that just as technological advances 

opened entirely new avenues of funding for 

today’s bankers, other options for using brokered 

deposits will surely be developed in the future. 

Deposit splitting by affiliated brokers. Despite 

the regulatory scrutiny that brokered deposits 

have received since the savings and loan crisis, 

the use of deposit brokers is recognized as a legitimate method of obtaining deposits. Although 

many brokers specialize in locating for their customers the highest rates of interest that are being 

paid on certificates of deposit,20 our discussion 

here concerns the subset of brokered funds that 

are used to expand deposit insurance coverage 

beyond the normal limits to much higher levels. 

The insurance-related risks associated with this 

form of brokerage are familiar. First, this form 

increases the exposure of the federal deposit 

insurance fund. Second, this form of brokerage 

does not subject banks to the market discipline 

that is ordinarily brought to bear by larger depositors when they are unable to obtain full insurance 

coverage.21 

Paradoxically, two root causes of the recent funding problem of depository institutions—the 

increased value of the stock market and a preference for higher-paying investments—have indirectly been the means by which larger institutions 

have found a reliable source of cash through brokered deposits. The volatility that characterized 

the stock market in the late twentieth century 

and the opening years of the twenty-first led 

many investors to be content to wait on the sidelines for future investment opportunities, and the 

result was a problem for stock brokerage houses: 

how should the resulting oversupply of cash be 

invested? 

In the late 1990s, Merrill Lynch began breaking 

up its customers’ accounts into amounts of 

$100,000 or less and distributing the money 

across its affiliated insured depository institutions, 

thus offering its clients additional deposit insurance coverage for their funds. Several other brokerage houses subsequently adopted similar 

deposit-splitting programs. But unlike Merrill 

Lynch’s program, many of the newer arrangements 

place funds with unaffiliated institutions, a course 

that may prove more troublesome for regulators. 

When deposit splitting is restricted to affiliated 

institutions, the growth of such programs is inherently limited, but when a brokerage uses unaffiliated institutions, the number of depository 

institutions available is virtually unlimited, and if 

this activity is taken to the extreme, the resulting 

influx of insured deposits could lead to a reinstatement of deposit insurance premiums.22 In 

addition, when unaffiliated institutions are used, 

volatility increases, since money that flows so easily into the insured accounts from the brokerage 

house is just as likely to go elsewhere if the least 

financial incentive arises. 

Although nothing limits this type of deposit-splitting program to large institutions, the largest 

institutions are currently the most active participants. But other deposit-splitting arrangements 

exist for mid- and smaller-size institutions. One 

such arrangement is an Internet-based service. 

18 Institutions with assets over $500 million are not able to use commercial 

loans as collateral for their FHLB advances.
 

19 Campbell (2001).
 

20 By using such publications as Bank Rate Monitor or by surfing the Internet,
 

bank customers can locate the higher-paying CDs without ever talking to a
 

deposit broker. Customers’ use of these vehicles has encouraged bankers who
 

are in pursuit of funding sources to keep pace with technological advances.
 

21 Market discipline is discussed in detail in Part 2.
 

22 This possibility assumes that Call Report data will reflect the change in
 

insurance status. An increase in the total deposits insured by the FDIC without a corresponding increase in the insurance fund balance would cause a
 

decrease in the reserve ratio. The effect of a change in the reserve ratio is
 

discussed at note 100 in the Deposit Insurance Issues section below.
 

FDIC BANKING REVIEW 5 2006, VOLUME 18, NO. 2 
The Liability Structure of FDIC-Insured Institutions 

An Internet-based deposit-splitting 

arrangement. Brokered deposits seemed to gain 

some respectability when the Promontory Financial Network (Promontory) launched the Certificate of Deposit Account Registry Service 

(CDARS) in January 2003.23 Promontory was 

founded by former Comptroller of the Currency 

and former FDIC board member Eugene Ludwig. 

Its board of directors includes a former vice chairman of the Federal Reserve Board, Alan S. Blinder, and a former FDIC chairman, L. William 

Seidman. Even though the principals of Promontory are quick to contrast their program with traditional brokered deposits,24 a skeptic could just 

as quickly disagree and argue that the system is 

nothing more than a well-connected brokereddeposit service. Nevertheless, the new service has 

met with approval from most observers.25 

CDARS allows participating banks and thrifts to 

offer their customers insurance on deposits greater 

than $100,000—currently, on deposits of up to 

$25 million.26 To illustrate how the service does 

this, let us assume a customer goes into a 

CDARS-participating bank to make a deposit of 

$200,000. The bank holds $100,000 in an 

account and places the other $100,000 with 

another institution belonging to the CDARS network and offering terms acceptable to the first 

bank’s customer. At the same time, another 

CDARS bank taking a deposit from one of its 

own customers arranges to deposit $100,000 with 

the first bank. By using the CDARS network, 

the first bank continues to hold $200,000 in its 

deposit base—an amount that increases its lending capacity; the bank-customer relationship is 

saved since the customer deals only with the first 

bank; and the $200,000 deposit is completely 

covered by deposit insurance. 

CDARS has been described as a clearinghouse 

that appears best suited to the small or mid-size 

institution,27 and it is true that the bank customer who benefits from CDARS is primarily an 

individual with over $100,000 in bank deposits. 

Nevertheless, the program is also being marketed 

to nonprofits, small businesses, and municipalities. In the case of municipal deposits, CDARS 

provides an additional benefit to the depository 

institution since the institution’s collateral is 

freed up under the program.28 

Although the service may resemble a typical 

deposit brokerage, some observers have favorably 

distinguished it from the brokered deposits that 

caused problems during the savings and loan crisis.29 Time will tell, but CDARS may well make 

brokered deposits a primary consideration when 

bank management is exploring funding options. 

Sweeps and Reserve Requirements 

Another area of a bank’s nondeposit liability 

management has been driven by legal restrictions. 

Under current law, depository institutions may 

not pay interest on demand deposits or standard 

checking accounts.30 However, because nonbusiness account holders are generally paid interest 

through the use of negotiable order of withdrawal 

(NOW) accounts,31 the only group that is effectively barred from earning interest on its demand 

deposit accounts (DDAs) are holders of business 

accounts. To circumvent the restriction on the 

payment of interest, many banks arrange for funds 

held in a commercial account to be swept into an 

interest-bearing instrument (target account) on a 

regular basis. 

23 ABA (2003).
 

24 Thompson (2003).
 

25 For example, CBS (2003) and ABA (2001).
 

26 As of March 2006, more than 1,100 banks were members of the network.
 

Initially the service offered only four-week to one-year CDs, but within six
 

months after it started, it began accepting individual retirement account CDs
 

and extended the available terms to two- and three-year CDs.
 

27 Bruce (2003).
 

28 In most cases, municipal deposits over $100,000 are required by law to be
 

either fully covered by deposit insurance or secured by a bank’s pledge of
 

securities. If municipalities can get deposit insurance on their total deposit
 

through CDARS, securities that would otherwise be used as collateral will
 

become available to the bank for other activities. Information on CDARS is
 

from the Web sites www.cdars.com and www.promnetwork.com.
 29 Vaughan and Yeager (2003).
 

30 The prohibition arose in the 1930s, when it was feared that deposit competition could destabilize the banking system. It was also feared that money-


center banks would draw funds from rural banks, diverting those funds from
 

productive agrarian uses to speculation in stocks. As a result, the Banking
 

Act of 1933 authorized the Federal Reserve to limit the interest rate member
 

banks could pay on time deposits; the Federal Reserve implemented the law
 

on November 1, 1933, by promulgating Regulation Q. Interest-rate controls
 

though Regulation Q existed in some form until 1982.
 

31 NOW accounts are interest-bearing savings accounts with check-writing privileges.
 

2006, VOLUME 18, NO. 2 6 FDIC BANKING REVIEW 
 

The Liability Structure of FDIC-Insured Institutions 

Current law limits the frequency of sweep activity 

according to the nature of the target account. If 

the target account being used by the sweep is a 

traditional savings account or money-market 

account, banks must limit transfers and withdrawals between the accounts to 6 per month or 

per statement cycle.32 However, if the funds are 

being transferred to a nondeposit instrument, 

such as repurchase agreements or unsecured 

instruments, the transfers (or “sweeps”) can be 

made daily. Consequently, bankers can offer the 

business customer a sweep account that offers 

automatic investment in a high yield account and 

a blended rate of interest that is closer to market 

rate.33 

An additional impetus to establishing sweep 

accounts is the dollar amount required to meet a 

bank’s reserve requirements. All depository institutions must reserve an amount equal to between 

3 percent and 10 percent of the funds they have 

in interest-bearing and noninterest-bearing 

checking accounts. The total required to be held 

in reserve is determined relative to the total 

deposits held in the qualifying accounts at each 

bank. Once the amount of the reserve is determined, banks may choose to hold their reserves in 

the form of cash (vault cash) or in an account at 

a Federal Reserve Bank (FRB) (sterile reserves), 

but in either case the funds are nonincome producing. As a result, a key strategy of bank liability management has been to discover ways of 

building a bank’s deposit base while keeping 

required reserves to a minimum.34 

Bankers have successfully reduced their reserves 

in recent years: reserve balances at FRBs fell 

approximately $3.5 billion between 1994 and 

2004, while total deposits increased by 95.6 percent during the same period.35 The American 

Bankers Association cited the example of an 

institution that was able to reduce its required 

reserves from $788,000 in August 2000 to 

$48,000 in August 2001, a period when deposits 

at the institution rose by $36 million.36 

Although many bankers have used sweep 

accounts successfully to reduce their reserve 

accounts, many analysts view the mechanisms 

being used to evade reserve requirements as “inefficient and costly” and believe they result in price 

distortion.37 

During the 109th session of Congress, the Senate 

discussed whether banks should pay interest on 

commercial deposit accounts and whether FRBs 

should pay interest on the reserves they hold.38 

These two issues have been put before Congress 

in the past, and like past bills, the recent bill 

combines the two issues.39 In fact, interest 

earned on a bank’s reserves is frequently viewed as 

an offset to the interest that the institution would 

pay on deposits held in its transaction accounts. 

If legislation goes forward, banks will likely 

unwind most of their sweep programs. Until 

then, sweep accounts continue to be used effectively by bank management. We next focus on 

retail sweep accounts, and sweeps to third-party 

money brokers, repurchase agreements, and international banking facilities. 

Retail sweep accounts. The history of retail 

sweep accounts shows clearly that even though 

paying interest on deposit accounts may have 

been the primary motivation for establishing 

sweeps, minimizing required reserves quickly 

became bank management’s paramount goal. 

As noted above, since the 1970s financial institutions have used sweep accounts to avoid the prohibition of interest payments on DDAs. In 1982, 

with the creation of the money-market deposit 

account (MMDA), the use of sweeps increased 

dramatically. The MMDA was statutorily man32 Recent congressional proposals would increase the number of transfers permitted between deposit accounts to 24 per month, allowing for a sweep on
 

each business day of the month.
 

33 The rate typically consists of the money market rate on the excess funds
 

and a NOW account rate on the threshold funds. 


34 Saunders and Cornett (2003) provide a good discussion.
 

35 www.federalreserve.gov/releases/z1/current/data.htm, chart L.110. Total
 

Deposits equal Checkable Deposits (line 30), plus Small Time and Savings
 

Deposits (line 34) and Large Time Deposits (line 35).
 

36 ABA (2001).
 

37 Bennett and Peristiani (2002), 1; Banking Policy Report (1997).
 

38 S.1586, 109th Cong., 1st sess. (2005).
 

39 See, for example, U.S. House Committee on Financial Services (2003,
 

2001). 

FDIC BANKING REVIEW 7 2006, VOLUME 18, NO. 2 
The Liability Structure of FDIC-Insured Institutions 

dated to be “directly equivalent to and competitive with money-market mutual funds.”40 With 

this new instrument, banks were finally able to 

pay their depositors a market rate of interest by 

sweeping any funds over an agreed-to amount 

into an interest-bearing MMDA. The funds were 

automatically returned to the transaction account 

with interest paid as the bank and depositor had 

previously agreed. By 1984, banks held more 

than $370 billion in MMDAs.41 But even 

though the MMDA gave banks a product without 

interest-rate ceilings, banks’ ability to compete 

with the sweep accounts that were available on 

the open market continued to be limited because 

MMDAs were prohibited from having more than 

six transfers and withdrawals per calendar month 

or statement cycle. 

Despite this disadvantage, when newly designed 

computer software enabled a bank to analyze its 

depositors’ use of their transaction accounts, 

sweeps became one of the main tools used to minimize a bank’s required reserves: any funds deemed 

by the bank to be excess were automatically 

transferred into MMDAs. (As a result of these 

transfers, a bank’s required reserve ratio could go 

from 10 percent to zero). And in 1994, when the 

Federal Reserve Board authorized banks to use 

this software to reclassify any transaction-account, 

retail sweep programs developed as banks notified 

their customers when they opened an account 

that “your deposit may be reclassified for purposes 

of compliance with Federal Reserve Regulation 

D. . . .” Banks began initiating sweeps without 

the customers’ explicit approval, and the volume 

of transfers occurring between transaction 

accounts and MMDAs increased dramatically. 

The MMDA used in a retail sweep program operates as a “shadow” account that is visible only to 

the depository institution. The bank reduces its 

required reserves while leaving unchanged the 

transaction deposits that are available to the 

depositor. A bank’s level of transaction accounts 

decreases sharply, whereas the depositor’s view of 

the account appears unaffected.42 Just as this 

transfer occurs without the depositor’s explicit 

approval or knowledge, so, too, any profits that 

the bank earns are not generally shared; in addition, banks also can choose how the funds will be 

invested. 

During 2002, the Federal Reserve estimated that 

banks swept $526.6 billion into MMDAs, and 

when then Federal Reserve governor Laurence 

Meyer testified before Congress, he expressed the 

belief that banks would probably reduce or eliminate the use of deposit sweeping if the Federal 

Reserve began paying interest on reserve 

accounts.43 

Third-party money brokers. When institutions 

choose to use third-party money-market brokers 

as a way to pay interest on commercial accounts, 

the depositor enters into an explicit contract for 

the broker’s services and the bank plays the role 

of conduit. The bank’s customer sets a target balance to hold in his or her transaction account, 

and any excess funds are wired out of the bank to 

a money-market broker. A variety of these 

arrangements are available, but in each of them 

the bank’s primary motivation is to make available to its commercial depositors interest-paying 

accounts through daily sweeps. Like retail sweep 

accounts, these programs reduce a bank’s required 

reserves, but the net saving realized by the bank is 

relatively insignificant, and unlike with retail 

sweep accounts, a bank loses control of the funds. 

Consequently, if new legislation authorized the 

FRBs to pay interest on reserve accounts and 

banks to pay interest on DDAs, banks would 

probably discontinue their use of third-party brokers (though the use of affiliated brokers might 

continue). If so, they may need to adjust their 

pricing strategies to maintain their profits. 

Repurchase agreements. Repurchase agreements 

(repos) are contracts between the depositor and 

40 Pub. L. No. 97-320, § 327, 96 Stat. 1468, 1501 (1982) (codified at 12
 

U.S.C. § 3503 (1982)).
 

41 Kaswell (1984).
 

42 See Anderson and Rasche (2000) for further discussion of retail sweep programs.
 

43 Meyer (2001). http://www.federalreserve.gov/boarddocs/testimony/
 

2001/20010313/default.htm.
 

2006, VOLUME 18, NO. 2 8 FDIC BANKING REVIEW 
The Liability Structure of FDIC-Insured Institutions 

the bank that are considered short-term debt obligations in which the bank secures its obligation 

to pay the amount due under the contract by a 

pledge of government securities.44 From the customer’s perspective the repo operates much like 

an insured deposit, since the customer’s funds 

(including interest) are secured up to the value of 

the collateral. In most cases, repos are overnight 

agreements: the funds are moved from the deposit 

account at the end of the business day and are 

returned to the account at the start of the following business day. With an in-house repo program, 

the bank decides how to invest the excess funds 

and retains the net interest margin. The customer is repaid under the terms of the repo from 

the general liquidity of the bank; that is, the specific government securities being used as collateral under the agreement are not generally sold. 

Using repo agreements as a liability management 

tool has several advantages. First, repos enhance 

the bank’s flexibility: the bank determines the 

rate of interest to be paid in the transaction and 

changes it as often as necessary to remain competitive in the market. Second, the bank retains 

total control: the bank decides how to invest the 

excess funds and retains the net interest margin. 

Third, the money remains in the community. But 

despite these advantages, repos require a pledge of 

collateral and therefore restrict the bank’s use of 

its securities. For this reason, the payment of 

interest on reserves and DDAs would probably 

result in a decrease in the number of sweep 

arrangements using repos. 

International banking facilities. During the 

1960s and 1970s the U.S. banking industry developed a substantial offshore international banking 

sector that allowed banks to attract deposits by 

avoiding statutory interest rate ceilings. But in 

1981, Congress alleviated the need for any offshore investment when it authorized U.S. banks 

to establish international banking facilities 

(IBFs). An IBF is merely a set of asset and liability accounts for international banking transactions 

that is segregated on the books and records of the 

establishing bank, with no separate organizational 

structure needed. Dollar-denominated deposits 

held at a U.S. IBF (or a bank located outside the 

United States) are Eurodollars—Eurodollars are 

not subject to interest-rate ceilings, reserve 

requirements, or deposit insurance assessments. 

The Federal Reserve authorized the establishment 

of IBFs at domestic banking offices in order to 

enhance the internationally competitive position 

of U.S. banking institutions.45 The Board reasoned that since many banks avoided regulatory 

requirements by conducting their international 

banking from foreign bank branches, IBFs would 

make the cost of conducting international banking activities at domestic offices competitive with 

the cost of conducting business from a foreign 

branch, and the money would be held in accounts 

within the United States. In addition, since the 

cost of establishing a foreign bank branch would 

prevent any institution except the largest moneycenter banks from participating in the international banking business, IBFs offered regional 

banks a way to become involved in international 

banking. Although stringent requirements limit 

the type of transaction that can be undertaken by 

an IBF, qualified funds may be swept between a 

U.S. bank and its IBF. 

Liquidity Risk Management 

The trends discussed above have changed the way 

banks manage their liquidity positions and the 

associated risks. The basic principles of sound liquidity risk management remain unchanged; however, those who apply them must take into 

account the new challenges and opportunities 

faced by banks today. 

Some banks have adjusted better than others, but 

regulators have noted several problems. Sound 

liquidity management requires that banks weigh 

44 Another type of repurchase agreement allows banks to borrow from major 

investment firms by pledging government, agency, or mortgage-backed securities as collateral for a loan at market rates on a short-term basis (usually 

extending from 30 to 180 days). This type of repo is not discussed here and 

would not be affected by the legislative changes in question. 

45 Chrystal (1984). 

FDIC BANKING REVIEW 9 2006, VOLUME 18, NO. 2 
The Liability Structure of FDIC-Insured Institutions 

the trade-offs among liquidity needs, return on 

investment, and managerial flexibility. Problems 

arise when banks begin using new funding sources 

without understanding them or making the 

appropriate changes to their liquidity management programs. For example, some banks chose 

structured FHLB advances that contained options 

they may not have fully understood. When the 

FHLBs exercised their options, or when the banks 

decided to change their funding strategies by prepaying advances, an apparently inexpensive borrowing could have unexpected and expensive 

consequences.46 Other areas where banks have 

sometimes failed to make adjustments include liquidity reporting and the associated management 

information systems support, as well as contingency planning: banks have not always adjusted 

their contingency plans or “what-if” analyses to 

address the characteristics of new funding sources. 

In 2001, the Office of the Comptroller of the 

Currency (OCC) found that up to 25 percent of 

the smaller banks that were represented at a large 

meeting of bankers had no up-to-date written 

contingency plans.47 

Some banks have addressed their funding needs 

by securitizing assets rather than holding them in 

their portfolio. This strategy raises different issues 

that, again, some banks have addressed more successfully than others. The most significant liquidity danger relates to early amortization clauses in 

the contracts. Such clauses are typically triggered 

by an indicator of deterioration in the performance of the securitized portfolio. When the clauses are triggered, the bank may suddenly be 

required to fund a large volume of new lending 

associated with the portfolio. 

For many banks, an increased reliance on wholesale funds could lead to more severe liquidity 

problems if their financial condition deteriorated. 

Most core deposits are insured, so these depositors 

have little reason to exit from a troubled bank. 

But many wholesale and rate-sensitive funding 

sources could quickly evaporate if the bank’s solvency were in doubt.48 Thus many banks should 

be more careful about contingency funding plans. 

Bank Liability Structure in the Future 

Having examined liability management strategies 

used by banks in response to the changing environment, we now venture to make predictions. 

We begin with core deposits because most banks 

still use core deposits as their preferred primary 

source of funding, turning to noncore deposits 

and other wholesale sources to supplement the 

funding of their operations. 

We expect that growth in core deposits will continue to lag behind asset growth. Bank customers 

do not need to keep their money in core deposits 

since technological improvements have simplified 

(and will continue to simplify) the process of 

shopping for competitive returns from a broad 

array of options. Furthermore, the aging of the 

U.S. population has negative (as well as positive) 

effects on core deposits. Certainly aging customers are more likely to need the liquidity and 

safety provided by deposit products and will 

therefore tend to increase the demand for these 

products; nevertheless, as assets are passed to the 

next generation, customers are likely to shift away 

from core deposits in search of better returns. 

Growth in core deposits will also be influenced by 

the health of the general economy and the stock 

market. If the country’s wealth continues to 

increase as it has in recent decades, the percentage of household wealth invested in core deposits 

will continue to drop (because wealthy consumers 

normally have a stronger appetite for and capacity 

to accept risk). A strong economy will bring 

about growth in core deposits, but the rate of 

growth will probably be slower than the rate of 

46 In 2002, 8 percent of FHLB net income came from prepayment fees.
 

47 Silverman (2001a).
 

48 See Shibut (2002) for a discussion of the incentives for various types of
 

liabilities to exit from a troubled bank. Note, however, that economists and
 

supervisors apparently disagree with each other on the likelihood that FHLB
 

advances will exit from the bank. Economists argue that FHLBs have no
 

incentive to exit from banks because their collateral protects them from losses
 

at failure; for example, see Shibut (2002); Stojanovic, Vaughan, and Yeager
 

(2000); and Ashley, Brewer, and Vincent (1998). Supervisors, in contrast,
 

warn that the FHLBs may exit from the bank or demand additional collateral
 

if the bank’s condition deteriorates; for example, see Sexton (2000b) and FDIC
 

(2002).
 

2006, VOLUME 18, NO. 2 10 FDIC BANKING REVIEW 
The Liability Structure of FDIC-Insured Institutions 

growth in bank assets. However, if the economy—or the stock market—is weak, core deposit 

growth could be quite strong during a period 

when loan demand is relatively weak.49 

The future is even murkier for total deposits than 

for core deposits. Of course, the factors that 

influence core deposits will affect noncore 

deposits in a similar way. But technological 

changes have probably influenced noncore 

deposits more than they have core deposits, and 

depositors holding large volumes of funds are 

more likely to be sensitive to perceived trade-offs 

between risk and return.50 When deposits are 

split and distributed among banks, deposits are 

insured at much higher levels than the level 

available through one institution. Deposit splitting allows investors to shift from low-risk lowreturn investments (money-market funds) to 

low-risk low-return insured investments (deposits) 

at a very low cost. In the short term, we expect 

this type of activity to continue generating 

deposit growth. Although the long-term prospect 

for the use of deposit splitting is particularly hard 

to ascertain, we expect these deposits to be more 

volatile than core deposits. 

Banks’ reliance on nondeposit sources, such as 

FHLB advances, will probably be determined 

largely by two factors: the ability of core deposits 

to fund asset growth, and returns on funds 

received from nondeposit sources compared with 

returns on deposits. If core deposit growth lags 

behind asset growth (as we expect), nondeposit 

instruments will continue to grow, as long as 

banks continue to offer competitive interest rates. 

PART 2. Implications for Bank Regulators 

Because these changes in bank liability structure 

have yielded substantial benefits to U.S. consumers and businesses, the task for regulators is 

not to find ways of turning back the clock but, 

instead, to accommodate these changes wisely. 

From this perspective we discuss several areas of 

bank regulation that are being affected by bank 

liability structure: supervision, deposit insurance, 

and failure resolution. Under supervision, we 

look at market discipline (how to exploit the 

power of markets to encourage good bank governance)51 and the examination of liquidity risk at 

banks. Under deposit insurance, we look at 

deposit-insurance pricing and identify other 

issues. And under failure resolution we look at 

depositor preference (the optimum order of payment for creditors in the event of a bank failure) 

and some operational issues raised by changes in 

bank liability structure. 

Market Discipline 

In recent years, regulators and economists have 

become increasingly interested in the use of markets to supplement or reduce the reliance on traditional supervision as a mechanism for 

monitoring and policing bank behavior.52 With 

banks relying more heavily on unprotected funding sources, the potential is greater for creditors to 

influence bank behavior—either directly (as 

banks respond to creditor demands) or indirectly 

(as supervisors respond to the changes in creditor 

behavior). Unprotected market participants have 

an incentive to monitor banks, an independent 

viewpoint, and certain advantages over supervisors.53 In addition, many market signals are available daily, whereas examinations, and even Call 

Reports, are available much less frequently. And 

with liability structure now able to change more 

quickly, the FDIC’s risk exposure could shift rapidly. Thus the regulatory community is taking 

some steps to expand the role of markets in the 

regulatory process and is exploring the possibility 

of other steps as well. Perhaps the most visible 

49 We concentrate on consumer issues here because most deposits are held
 

by consumers. But if legislation were passed allowing interest payments on
 

demand deposits, deposits held by businesses could increase markedly.
 

50 The search costs and switching costs associated with maximizing one’s
 

return are similar for large and small depositors, but large depositors have
 

more to gain from a higher return.
 

51 One way to use market discipline relates to capital regulation. We explore
 

market discipline imposed by stockholders, but we do not address the question of capital requirements.
 

52 Sironi (2003), Federal Reserve Board (1999b), and Evanoff and Wall (2000)
 

discuss industry changes that support an increased emphasis on market discipline.
 

53 See Flannery (1998) for a discussion.
 

FDIC BANKING REVIEW 11 2006, VOLUME 18, NO. 2 
The Liability Structure of FDIC-Insured Institutions 

sign of banking regulators’ resolve to strengthen 

market discipline is the status it has in the Basel 

II accord: market discipline is the “third pillar.”54 

Conditions Necessary for Market Discipline to 

Succeed 

The term “market discipline” is often used broadly to represent the entire role that markets play in 

bank behavior. But to examine the effectiveness 

of market discipline and the ways in which regulators could enhance its influence, we need more 

specificity. We need a more precise definition of 

market discipline, and we need to understand the 

conditions necessary if market discipline is to succeed. 

Flannery defined market discipline as the ability 

of markets to perform two distinct functions: to 

monitor changes in the bank’s condition and to 

influence the bank’s actions.55 Llewellyn used 

the same breakdown of monitoring changes in 

condition and influencing actions, but he concentrated on the conditions necessary if market discipline—monitoring and influencing—is to 

succeed. He presented seven such conditions: 

1. Relevant and accurate information must be
 

available to market participants.
 

2. There must be enough market participants
 

who are able to analyze the information.
 

3. The market participants must have adequate,
 

clear incentives to monitor banks.
 

4. A sufficient number of market participants
 

must act on the information.
 

5. The market response must be rational. 

6. The response must lead to equilibrating 

change in market quantities or prices or both. 

7. Bank managers must have the incentives and 

ability to respond to the market changes (or 

must be conscious of the potential threat of 

changes in quantities, prices, or both).56 

The last condition is the only one that relates to 

the market’s ability to influence banks. A critical 

aspect of that criterion is timing. When a bank is 

troubled, market discipline is most useful if it 

influences bank managers before it is too late to 

avoid failure.57 In addition, regulators would naturally prefer that the managerial response be 

directed at reducing the likelihood or cost of failure (rather than taking on additional risk). 

Assuming that market discipline is transmitted 

through price and quantity signals, Llewellyn concludes that market discipline will not work effectively if any of the seven conditions is violated. 

Furthermore, he concludes that actions taken by 

banking regulators to address any of these conditions can improve the effectiveness of market discipline.58 

Evidence about the Provision of Relevant and 

Accurate Data to the Markets 

The availability of relevant and accurate data is 

Llewellyn’s first condition for effective market discipline. The banking agencies primarily use two 

tools to help ensure that this condition is met: 

reporting requirements and examinations. 

Among the large number of reporting requirements imposed on banks is the requirement that 

banks collect, edit, and supply Call Report data 

quarterly. The second tool—the examination 

function—reduces the ability of banks to ignore 

or hide their financial difficulties from market 

participants. Managers at troubled banks have a 

strong incentive to hide problems, since both 

markets and regulators impose discipline when 

the problems become apparent. In fact, several 

researchers have found that troubled banks frequently reveal bad news (through increases in 

loan-loss reserves and reductions in equity) short54 For details, see Bank for International Settlements (2001a, 2001b). See 

also Burton and Seale (2005). 

55 Flannery (2001). 

56 Llewellyn (2002). 

57 FDIC (1997), 487–88, describes the “anatomy” of a failure, with the earliest decisions made some time before problems become apparent in the 

accounting data. The literature on prompt corrective action puts a strong 

emphasis on timing: the triggers must occur before it is too late for the 

bank’s management to turn the bank around. See Jones and King (1995) 

and Peek and Rosengren (1996). 

58 Llewellyn (2002). Similar lists of conditions can be found in Llewellyn 

(2005) and Hamalainen, Hall, and Howcroft (2005). 

2006, VOLUME 18, NO. 2 12 FDIC BANKING REVIEW 
The Liability Structure of FDIC-Insured Institutions 

ly after a supervisory examination or an associated 

enforcement action.59 Therefore, changes made 

to enhance market discipline cannot ignore the 

evidence that supervisors play an important role 

in providing accurate data—particularly for banks 

that become troubled. This evidence also indicates that efforts to supply the markets with negative information gleaned by supervisors might be 

a fruitful avenue for enhancing market discipline. 

Evidence about Whether Markets Monitor Banks 

Most of Llewellyn’s conditions (conditions 2–6) 

relate to the ability of markets to monitor banks 

and react rationally. The evidence that unprotected creditors are able and willing to monitor 

banks and to act as expected on available information is very strong. The volume of uninsured 

and jumbo CDs drops substantially during the 

period leading up to failure.60 CD yields increase 

with bank risk.61 Stock market prices drop when 

financial condition variables indicate problems 

and when examination ratings fall, and subordinated debt yields are higher for riskier banking 

companies than for less-risky ones.62 These findings indicate that, to some extent, the first six 

conditions set by Llewellyn are being met. 

The evidence is less compelling (and less plentiful) when one asks whether market information 

could be used to improve regulatory monitoring. 

Gilbert, Meyer, and Vaughan tested the use of 

jumbo-CD rates and runoff as a screening tool to 

predict downgrades in supervisory ratings or as a 

factor to improve off-site monitoring models 

(which are currently based on accounting data).63 

They found that jumbo-CD information contributed nothing in either capacity, and suggested 

that the strong economy during their sample period (1991–1999) contributed to the weak relationship (that is, depositors might have had little 

incentive to monitor banks because the industry 

was so healthy). Jagtiani and Lemeaux examined 

the stock, bond, and deposit data of five publicly 

traded companies that failed.64 They found that 

except at one bank, both bond and equity markets were slower to identify problems than supervisors were. 

Berger, Davies, and Flannery examined the success of bond ratings, abnormal stock returns, and 

supervisory assessments (examination ratings) in 

predicting the future performance of banks.65 

They found that bond rating agencies (but not 

stock market participants) acquire and use information that would improve the ability of supervisory assessments to predict future changes in bank 

condition. However, their method did not test 

for the extent to which the benefits from bond 

rating and stock market information were also 

captured in the financial data collected in the 

Call Reports. 

A few studies have tested the ability of stock market data to improve off-site monitoring models. 

Curry, Elmer, and Fissel found statistically significant relationships between various stock market 

variables and bank condition.66 They also found 

that the addition of these variables to an off-site 

model improved performance, but the incremental improvement was very small. Krainer and 

Lopez studied the effectiveness of adding both 

stock market and bond market data to off-site 

models. They had similar results, finding that 

abnormal returns tended to anticipate examination rating downgrades. They also found that the 

addition of stock market and bond market data to 

59 See U.S. General Accounting Office (1990, 1992); Dahl, O’Keefe, and Hanweck (1997); Gunther and Moore (2000); and Curry et al. (1999).
 

60 See Jordan (2000); Goldberg and Hudges (2002); Silverberg (1993); and
 

Marino and Bennett (1999).
 

61 See Park and Peristiani (1998); Jordan (2000); Maechler and McDill (2003);
 

and Hall et al. (2003).
 

62 See Flannery (1998) for a brief review of the literature on a wide range of
 

related topics. The Federal Reserve Board (1999b) provides a more thorough
 

review on sub-debt literature, and Krainer and Lopez (2002) provide a review
 

of the literature on the stock market. See also Berger, Davies, and Flannery
 

(2000); Morgan and Stiroh (1999); DeYoung et al. (2001); and Curry, Elmer,
 

and Fissel (2003).
 

63 Gilbert, Meyer, and Vaughan (2003).
 

64 Jagtiani and Lemeaux (2000).
 

65 Berger, Davies, and Flannery (2000).
 

66 Curry, Elmer, and Fissel (2003). They found statistical significance even
 

after controlling for relevant accounting variables. Gunther, Levonian, and
 

Moore (2001) performed a similar analysis that also found a statistically significant relationship between the estimated default frequency (EDF) implied
 

from stock market data and BOPEC (an acronym for a bank holding company
 

rating: B for bank subsidiaries; O for other nonbank subsidiaries; P for parent
 

control; E for consolidated earnings; C for consolidated capital) ratings. They
 

found a small improvement in in-sample tests, but they did not provide out-ofsample tests.
 

FDIC BANKING REVIEW 13 2006, VOLUME 18, NO. 2 
The Liability Structure of FDIC-Insured Institutions 

off-site models improved the in-sample fit but did 

not materially improve predictive ability in outof-sample tests.67 

In summary, researchers have found plenty of evidence that uninsured depositors, bond investors, 

and stockholders impose penalties on banks that 

become riskier. However, researchers’ attempts to 

use market data to improve the predictive ability 

of supervisory off-site models have to date been 

disappointing. 

Evidence about Whether Markets Influence Banks 

Llewellyn’s last condition addresses the ability 

and incentive of bank managers to respond to 

market signals. Bank managers’ response is just as 

important as the market’s ability to react to bank 

condition, but it has received far less attention 

from researchers.68 

Billett, Garfinkel, and O’Neal examined the 

abnormal stock returns of banks that had been 

downgraded.69 They found that banks with high 

levels of insured deposits did not experience a significant reduction in abnormal returns from a 

downgrade, but banks with lower levels of insured 

deposits did. They also found that banks relied 

more heavily on insured deposits for funding after 

the downgrade. Several other researchers have 

documented significant shifts away from unprotected funds toward insured deposits and secured 

liabilities as banks become troubled.70 There is 

also theoretical evidence that supports such a 

shift.71 This shift is frequently cited as evidence 

that market discipline works, and in a way, those 

authors are correct: bank managers clearly 

respond to market signals by shifting their funding strategy. But Billett, Garfinkel, and O’Neal 

concluded that the ready availability of insured 

deposits undermines the ability of markets to discipline bank management. 

Billett, Garfinkel, and O’Neal have company. 

Jagtiani and Lemeaux reached the same conclusion, based on their inspection of five publicly 

held banks that failed. Ashley, Brewer, and Vincent came to a similar conclusion about FHLB 

advances, based on their finding that during the 

thrift crisis, insolvent thrifts tended to rely more 

heavily on FHLB advances than healthy thrifts. 

Hall et al. studied the effects of depositor discipline on the operating results of healthy banks 

and found that the effects were too small to influence bank management.72 Therefore, under the 

current regulatory regime, the discipline imposed 

by bank creditors generally causes bank managers 

to adjust their funding strategy but not necessarily 

to reduce their risk exposure. 

There is some evidence indicating that stockholders tend to encourage rather than discourage risktaking at banks—particularly when bank 

condition is weak. Laeven found that concentrated ownership in banks (which ameliorates the 

agency problem) is associated with greater risk. 

Saunders, Strock, and Travelos found that management-controlled banks are more risk averse 

than stockholder-controlled banks. Demsetz, 

Saidenberg, and Strahan found that the combination of low franchise value and large insider holdings (the latter align the incentives of managers 

and owners) is associated with higher levels of 

bank risk.73 

We found two studies that documented evidence 

of a beneficial (risk-reducing) managerial 

response to market discipline. Cannella, Fraser, 

and Lee found that senior managers have more 

trouble remaining employed in the industry if 

their bank fails, particularly if the reason for failure was arguably within the manager’s control. 

Baumann and Nier found that banks that were 

67 Krainer and Lopez (2003). 

68 Flannery (1998), Bliss and Flannery (2000), and Bliss (2001) all note this
 

as an important area for future research.
 

69 Billett, Garfinkel, and O’Neal (1998).
 

70 For evidence related to insured deposits, see Jordan (2000); Goldberg and
 

Hudges (2002); Silverberg (1993); and Marino and Bennett (1999). For evidence related to secured credits, see Hirschhorn and Zervos (1990) and Ashley, Brewer, and Vincent (1998).
 

71 See Jordan (2000) and Birchler (2000).
 

72 Jagtiani and Lemeaux (2000); Ashley, Brewer, and Vincent (1998); Hall et
 

al. (2003). Although Hall et al. concentrated their analysis on healthy banks
 

(with a CAMELS rating of 1 or 2), the results did not change materially when
 

they did robustness checks that included weaker banks.
 

73 Laeven (2002); Saunders, Strock, and Travelos (1990); and Demsetz,
 

Saidenberg, and Strahan (1997).
 

2006, VOLUME 18, NO. 2 14 FDIC BANKING REVIEW 
The Liability Structure of FDIC-Insured Institutions 

subject to more market discipline had higher capital ratios.74 

Bliss and Flannery examined the effects that 

abnormal returns on stocks and bonds had on a 

variety of managerial action variables.75 

Although they found anecdotal evidence that 

markets influence bank management in extreme 

circumstances, their results showed no significant 

relationship between abnormal returns and subsequent managerial actions. They concluded that 

“in the absence of specific evidence that bank 

holding company stock and bondholders can 

effectively influence managerial actions under 

normal operating conditions, supervisors would be 

unwise to rely on investors . . . to constrain bank 

holding company risk-taking.”76 DeYoung et al., 

on the basis of their analysis of the effects of 

examination ratings on sub-debt spreads, concluded that their “results suggest that bond investors 

believe supervisory discipline to be more effective 

than what the market itself can apply.”77 

Market Discipline in the Future 

Most economists and regulators now believe that 

a heavier reliance on market discipline could 

potentially improve both the supervisory function 

and the corporate governance of the banking 

industry. Related proposals that have been put 

forth vary widely but can be categorized in one of 

two basic groups: those that would make major 

changes, replacing segments of the supervisory 

function and the safety net with market-driven 

alternatives; and those that would make lesser 

changes, enhancing (but not replacing) the basic 

supervisory scheme and safety net that are currently in place. As may be apparent, the largest 

differences of opinion are tied to fundamental 

viewpoints about the need for bank regulation in 

the first place.78 

Among the several proposals for major changes is 

one by Stern, who recommended a mandate to 

haircut all uninsured depositors at failure, regardless of the circumstances.79 Another is by 

Calomiris, who proposed that large banks be 

required to issue sub debt with an interest rate 

below a specified threshold. If a bank were 

unable to meet these conditions, its assets would 

have to shrink 1/24th each month until the debt 

was issued (or the bank failed).80 Proposals along 

these lines reduce the opportunity for regulatory 

forbearance and increase the market’s influence 

on bank behavior. Proposals for modest changes 

are illustrated by calls for expanding disclosure 

regulations or for adopting off-site models that 

incorporate market data. 

There are a number of reasons that modest 

changes may be viewed (at least by regulators and 

Congress) as more palatable than major changes. 

First, the trade-offs related to modest changes are 

far easier to understand than are those related to 

major changes. Thus, the more sweeping proposals may be viewed as riskier because of unanticipated consequences. Second, the lack of 

convincing evidence that markets cause managers 

at troubled banks to reduce risk exposure is a concern. Third, some stakeholders (including regulators) may have a vested interest in the status 

quo.81 

A fourth complicating factor is that regulatory 

policies can have inconsistent effects over time. 

The effects of any policy that is tied to market 

behavior are likely to vary over the business cycle. 

Extensive shifts in market behavior have been 

74 Cannella, Fraser, and Lee (1995); and Baumann and Nier (2003). There is
 

also ample evidence that banks generally held more capital before the introduction of deposit insurance.
 

75 Bliss and Flannery (2000). The variables ranged from dividend payments
 

and staff levels (presumably fully under the control of management) to the
 

book value of equity (where control may have been less complete).
 

76 Ibid, 26.
 

77 DeYoung et al. (2001), 924. They found that sub-debt spreads fell when
 

troubled banks retained a bad examination rating (that is, when a bank with
 

a CAMELS 4 or 5 rating was not upgraded to a CAMELS 1, 2, or 3 during
 

the examination). They also found that spreads increased when moderately
 

troubled banks were upgraded (that is, when banks with a CAMELS rating of
 

3 were upgraded to a rating of 1 or 2).
 

78 Benston (1993) provides an example of two diametrically opposed viewpoints.
 

79 Stern (1997). See also Feldman and Rolnick (1997).
 

80 Calomiris (1997). The proposal included additional requirements about the
 

total amount outstanding (as a percentage of assets) and the frequency of
 

rollover.
 

81 See, for example, Kane (1990), Boot and Thakor (1993), and Rosen (2003).
 

FDIC BANKING REVIEW 15 2006, VOLUME 18, NO. 2 
The Liability Structure of FDIC-Insured Institutions 

documented by several researchers. Covitz, Hancock, and Kwast found that sub-debt yields were 

significantly influenced by issuance decisions, 

which in turn were influenced by factors that varied substantially over time. Hall et al. suggested 

that shifts might occur in the monitoring efforts 

of uninsured depositors, depending on the overall 

health of the banking industry. Danielsson and 

Shin described how market reactions to increases 

in risk have sometimes amplified shocks to the 

system.82 

Proposals for major change usually include “hard” 

triggers based on market signals83 and therefore 

provide less room for regulatory discretion in 

extreme circumstances. Historically large banks 

become troubled or fail during periods of industrywide distress, and market volatility during those 

periods may bring about results that were not 

anticipated when the regulatory system was 

designed.84 Furthermore, not only the market’s 

reaction but also the circumstances leading to the 

industry stress may be unexpected. In large part, 

the safety net was created to limit the spillover 

effects of bank failures during periods such as 

these. During the hearings that led up to passage 

of FDICIA, Congress spent a lot of time discussing these issues, and the result was prompt 

corrective action (PCA) and the least-cost test 

plus the systemic-risk determination.85 We see 

no trends in banking (or in recent research) that 

would support a shift away from regulatory discretion in extreme circumstances. Therefore, we 

believe that any near-term changes will probably 

aim for relatively modest enhancements to the 

current supervisory scheme. 

Although there is no consensus about the best 

approach, some types of proposals have more support than others. The most frequent recommendation is for more research, and that is already 

occurring. A basic view is that improvements in 

the use of market discipline should be measured 

in terms of net social benefits.86 In other words, 

one should take into account the substantial differences (in costs and benefits) that may exist 

between the type 1 and type 2 errors associated 

with market responses. Along the same lines, 

Flannery suggested that regulators should not 

insist on the perfect solution before instituting 

changes but, instead, should adopt options that 

yield better solutions more often, or better results 

for the most important circumstances.87 

Some of the likely changes are well accepted in 

academic and regulatory circles—in particular, 

increased disclosures to the market and increased 

use of market data in supervisory judgments. In 

addition, some economists have recommended 

incorporating market data into deposit insurance 

prices at large banks. 

Increased disclosure requirements are already 

moving toward adoption as part of the Basel II 

effort.88 Given the research showing that supervisors often have an advantage over markets in 

uncovering private negative information, future 

research may advocate—and future changes in 

the reporting requirements may institute— 

improved disclosures by banks (or perhaps supervisors) when trouble arises. 

Supervisors will probably continue to expand 

their use of these data in multiple ways. Even 

though the research to date has not produced 

large improvements in off-site models, supervisors 

will probably continue to expand the use of these 

data in the off-site review process.89 Additional 

research might produce clearer—and thus more 

useful—signals for regulators. Also possible are 

changes in the training of examiners (training 

them to understand market signals better) and in 

the conducting of on-site examinations.90 

82 Federal Reserve Board (1999b), especially 19 and 58; Covitz, Hancock, and 

Kwast (2002); Hall et al. (2003), 25–26; Danielsson and Shin (2002). 


83 We define a hard trigger as one where there is effectively no supervisory
 

discretion.
 

84 A recent example occurred in 1998 after Russia defaulted on its debt obligations. Bond spreads increased dramatically and liquidity dried up. Other,
 

more extreme examples date from the pre-FDIC banking panics.
 

85 Under the systemic-risk determination, regulators can opt to ignore the
 

least-cost test if a bank has failed, but only after crossing several statutory
 

hurdles. In addition, regulators must publish a written analysis of the reasoning behind the decision. 


86 Flannery (2001), 112. Meyer (1999) echoes this view.
 

87 Flannery (1998), 280.
 

88 See BIS (2001b) for additional information.
 

89 See Burton and Seale (2005) for a discussion.
 

90 See Emmons, Gilbert, and Vaughan (2001).
 

2006, VOLUME 18, NO. 2 16 FDIC BANKING REVIEW 
The Liability Structure of FDIC-Insured Institutions 

Liquidity Risk and Other Supervisory 

Issues 

Because many banks have adopted more complex 

funding strategies to address shortfalls in core 

deposit funding, supervisors have reconsidered 

their evaluation of liquidity risk. Regulatory 

agencies have increased their emphasis on liquidity management and updated their examiner guidance and training. In 2000 the Bank for 

International Settlements (BIS) published revised 

principles on managing liquidity.91 In 2001, the 

U.S. banking agencies released an interagency 

advisory letter on brokered and rate-sensitive 

deposits, reminding bankers to undertake riskmanagement measures that are appropriate for 

banks that rely on these instruments.92 

In 2001 both the OCC and the FDIC published 

new examination guidance on liquidity. The 

FDIC’s revisions incorporated changes and additions in several areas, including FHLB advances, 

securitization, ratio analysis, contingent liabilities, 

brokered and rate-sensitive deposits, and factors 

for examiners to consider when rating banks on 

liquidity.93 In 2000 and 2002 the FDIC also published new guidance on specific areas related to 

liquidity.94 As banks continue to adjust their 

strategies and examiners continue to identify 

weaknesses in some banks’ strategies, additional 

changes in examination procedures and training 

may be needed. 

If core deposit growth continues to lag behind 

asset growth and banks are forced to rely more 

heavily on wholesale deposits, contingency planning may require more emphasis. For troubled 

banks, examiners may need to pay more attention 

to liquidity pressures than they did in the past. 

The easy availability of wholesale funding sources 

raises other supervisory issues. It enables nontraditional banks to grow (and take on additional 

risk) very quickly. There is a well-established link 

among high growth, risk exposure, and bank failure.95 The OCC found a positive relationship 

between the reliance on wholesale funding and 

risk exposure.96 Hall et al. found that riskier 

banks used jumbo CDs more heavily than lowrisk banks, and McDill and Maechler found that 

banks with a CAMELS rating of 3 relied on uninsured deposits more heavily than healthier 

banks.97 Supervisors have already instituted offsite monitoring tools related to high growth. 

Now that protected wholesale funding sources are 

becoming more readily available, should regulators be considering other actions as well? 

The supervisory function might also benefit from 

an investigation into new standard performance 

ratios for liquidity measurement. Liquidity measurement has always been imprecise because it 

depends on future circumstances, including the 

market’s future view of the bank. Jim Moss, a 

managing director at Fitch Inc., phrased it well: 

“You can do a lot of analysis, but there’s that 

human element attached to liquidity.”98 The traditional ratio of loans to core deposits—never sufficient by itself—has become less meaningful and 

is now inadequate since not only are many ratesensitive deposits issued at retail for amounts 

slightly below $100,000, in some cases, deposits in 

accounts above $100,000 may behave like core 

deposits.99 Are there other, more useful measures 

that could be adopted, or other data that should 

be collected, to facilitate supervisory or peergroup analysis? These questions might be an area 

where future research would be fruitful. 

91 BIS (2000).
 

92 Office of the Comptroller of the Currency et al. (2001).
 

93 Zamorski (2001), 1–2. This memo (that is, the FDIC’s new guidance) introduced a major revision of the liquidity and fund management section of the
 

examination guidelines.
 

94 See Sexton (2000a) on securitizations, Sexton (2000b) on FHLB advances,
 

and Zamorski (2002) on wholesale funding. Note that the guidance is
 

designed not solely to warn examiners of possible problems but also to
 

remind them that sound liquidity management can include the use of wholesale funding, securitization, and so forth.
 

95 See FDIC (1997); Nuxoll, O’Keefe, and Samolyk (2003); and McDill (2004).
 

96 OCC et al. (2001).
 

97 Hall et al. (2003); McDill and Maechler (2003).
 

98 Quoted in Davenport (2003).
 

99 Some bankers have argued that this would be the case for certain large
 

banks that use brokered deposits from an affiliated broker. In addition, some
 

jumbo CDs may be long-term deposits that are fully insured.
 

FDIC BANKING REVIEW 17 2006, VOLUME 18, NO. 2 
 

The Liability Structure of FDIC-Insured Institutions 

Deposit Insurance Issues 

Bank liability structure affects not only supervision 

but also deposit insurance, and in several ways. As 

banks rely less on domestic deposits, the relationship among the assessment base used for deposit 

insurance pricing, the designated reserve ratio 

(DRR),100 and the FDIC’s risk exposure has diminished. The FDIC’s risk exposure is largely driven 

by the quantity and quality of industry assets and 

the industry’s equity position.101 However, the 

assessment base includes only domestic deposits, 

and the reserve ratio includes only insured 

deposits. When asset growth is funded by nondeposit liabilities, the FDIC’s risk exposure changes 

with no similar change in the assessment base or 

the reserve ratio (or, therefore, in the required 

minimum fund balance). When asset growth is 

funded by uninsured deposits, the assessment base 

increases but the reserve ratio does not increase. 

Thus the FDIC’s funding mechanisms do not 

respond to changes in the fund’s risk exposure from 

asset growth funded by nondeposit liabilities—or 

even by uninsured deposits. 

Several economists and regulators have raised the 

question of whether the FDIC’s pricing mechanism should be adjusted to reflect shifts in the 

industry’s funding mix.102 Twice in the last 

decade the FDIC itself has asked for public comments on the issue.103 Options include changing 

the assessment base to: insured deposits; domestic 

deposits plus secured borrowing; total assets; or 

total liabilities excluding subordinated debt. 

Alternatively, the price (rather than the assessment base) could be adjusted for the effects of liability structure on the FDIC’s risk exposure. 

Most of the deposit insurance pricing options apply 

to particular priority classes defined under U.S. 

bank receivership law. In the event of failure, 

secured claims are paid first (up to the amount of 

the collateral), and these have received the most 

attention in the related literature. Administrative 

expenses of the receivership are paid next, followed 

by deposits (both insured and uninsured); then 

general trade claims, including foreign deposits and 

other unsecured claims; then subordinated debts; 

and finally shareholder claims. 

Currently an institution’s assessment base is 

approximately equal to its domestic deposits minus 

a deduction for float. Because large banks rely on 

nondeposit liabilities much more heavily than 

small banks, any potential changes to the assessment base raise profound issues about the distribution of insurance costs across the banking industry. 

There has been less research about the question of 

whether—given the recent changes in liability 

structure—the reserve ratio is an appropriate measure of the adequacy of the insurance funds. It is 

not clear whether changes in bank liability structure have materially detracted from the reserve 

ratio’s usefulness as a rough measure of fund adequacy.104 This area may be worthy of future 

research. 

100 Under FDICIA, the DRR—the reserve ratio calculated as the ratio between the 

insurance fund balance and total deposits insured by the FDIC—was set by 

statute at 1.25 percent. In addition, the FDIC was required to impose hefty 

assessments on banks whenever the reserve ratio of the Bank Insurance Fund or 

the Savings Association Insurance Fund fell substantially below the DRR. Under 

the Federal Deposit Insurance Reform Act of 2005, the fixed DRR of 1.25 percent was replaced by a reserve range of 1.15 percent to1.50 percent, and the 

FDIC Board of Directors was directed to set and annually publish a DRR within 

that reserve range. If the reserve ratio falls below 1.15 percent, the legislation 

required that the FDIC set assessments at a level that will bring the fund balance back to 1.15 within five years. 

101 More specifically, one way to measure the FDIC’s risk exposure for a particular bank is to calculate the bank’s expected probability of default multiplied by 

the expected total loss, multiplied by the FDIC’s percentage of the expected loss. 

The probability of default and expected total loss tend to be related to asset 

composition. Equity holders normally lose their entire investment at failure. The 

remaining loss is, for the most part, borne by the FDIC because the FDIC cannot 

flee a bank before failure, but other unprotected credits usually flee or protect 

themselves through collateral arrangements before failure. See Shibut (2002) for 

a more detailed discussion. This section draws heavily from that paper. 

102 See Silverberg (1993); Baer (2000); Bair (2001); Seidman (2001); Carnell 

(2001); and Thomas (2001). 

103 In 1994, the FDIC issued an Advance Notice of Proposed Rulemaking (ANPR) 

focused on the assessment base; the notice did not result in changes to the 

assessment base (FDIC 1994). In 2000 the FDIC’s options paper on deposit 

insurance reform also raised the issue of the assessment base (FDIC 2000). 

104 Other factors, such as the riskiness of the industry’s asset holdings or its 

financial condition, are also not captured in the reserve ratio. Most of the discussion of fund sufficiency focuses on the appropriate role of an insurance fund, 

public versus private funding, ex ante versus ex post funding, measures of fund 

exposure, and concentration risk (that is, funding adequacy, given the size of the 

largest insured bank). Another way to gauge fund adequacy is through the 

reserving process for near-term future losses. Liability structure also affects the 

FDIC’s contingent-loss reserves. Both the current method used by the FDIC to 

estimate contingent-loss reserves, and recent proposals for change in the current 

method, take liability structure into account. The FDIC hired McKinsey and Company in 2003 to review its risk management program and contingent-loss reserving methods. See McKinsey and Company (2003) for details. One of the 

short-term recommendations was to change the contingent-loss reserve to take 

liabilities into account (p. 19); the FDIC has already made this change. McKinsey concurred with the FDIC’s plan to move toward using credit-loss modeling 

techniques for measuring the corporation’s contingent-loss reserve. Jarrow et al. 

(2003) have developed a draft contingent-loss model for this purpose. Their 

model also incorporates liability structure into its loss estimates. 

2006, VOLUME 18, NO. 2 18 FDIC BANKING REVIEW 
The Liability Structure of FDIC-Insured Institutions 

Recent developments in wholesale deposit practices raise other policy issues that have received 

scant attention by regulators but may be worth 

additional analysis as well, and possibly changes 

in policy. We list these other policy issues here, 

but in the rest of the section we concentrate on 

the pricing issues. The first of these other issues 

is that some banks (particularly those with affiliated brokerages) could easily shift from deposit to 

nondeposit funding whenever insurance losses 

triggered substantial premiums. Such shifting 

could increase the volatility of the reserve ratios 

(and thus the volatility of premiums) and could 

raise questions about equity across banks. Second, deposit-splitting practices can circumvent 

the insurance coverage limits that Congress 

intended. Should regulators (or more likely Congress) be taking action to make the $100,000 

limit105 more meaningful for depositors? Another 

question is the most appropriate treatment of 

sweep accounts for deposit insurance purposes. 

Secured Liabilities 

Under the FDIC’s current pricing method, 

secured nondeposit claims introduce the most distortion. If a bank fails, secured claimants are 

invariably paid in full because collateral protects 

them.106 Thus, losses are usually borne by the 

FDIC and other unprotected creditors.107 If a 

bank shifts its funding strategy away from domestic deposits and toward secured borrowing but 

makes no other change to its business strategy, 

the FDIC’s loss exposure remains unchanged even 

though insured deposits fall.108 Moreover, most 

banks are currently in a position to make this 

shift; that is, they can choose their asset portfolio 

independently of their funding sources.109 And 

the FDIC’s pricing method provides an incentive 

for banks to shift from uninsured deposits to 

secured borrowing, since investors are willing to 

accept a lower interest rate when their investment is protected by collateral.110 In addition, 

ceteris paribus, banks that do not rely on secured 

borrowing for funding are effectively subsidizing 

banks that do. If two banks are identical in all 

aspects except that one relies on domestic 

deposits for funding but the other relies on a mix 

of domestic deposits and secured borrowing, both 

banks will expose the FDIC to identical losses, 

but the second bank will pay smaller assessments. 

Some researchers have argued that the ready 

availability of secured borrowing may have important secondary effects as well. If bank managers 

know that they can easily replace unprotected 

credits—uninsured and unsecured debt—with 

secured borrowing if their financial condition 

deteriorates, they may choose to increase their 

exposure to risk.111 

Therefore, both Silverberg and Baer have urged 

that secured liabilities be included in the FDIC’s 

assessment base. Bair, Seidman, Carnell, and 

Thomas have recommended that the appropriate 

treatment of secured liabilities be considered as 

part of deposit insurance reform.112 

Uninsured Deposits 

In contrast to the case of secured borrowing, if a 

bank shifts its funding strategy away from insured 

deposits and toward uninsured deposits but makes 

no other change to its business strategy, the 

FDIC’s loss exposure decreases as losses are shifted 

105 $250,000 for individual retirement accounts. 

106 Theoretically, they could be haircut if the value of the collateral were less 

than the outstanding balance of the borrowing. 

107 Of course, the availability of collateral limits the volume of secured credits 

that can be fully protected. In practice, however, these limits have rarely 

been binding. 

108 The funding shift would not influence total losses to unprotected credits 

or the FDIC. Therefore, even though the volume of deposits fell, losses 

imposed on deposits at failure would not change. Shibut (2002) elaborates 

this point. 

109 Of course, there are important limits on asset growth related to equity, but 

most banks meet the regulatory minimums for capital. Given the choices 

available for the types of assets that can be pledged as collateral, most banks 

have the freedom to increase their secured borrowing substantially without 

adjusting their asset portfolio. Their ability to increase unprotected––uninsured and unsecured––funding is tied much more closely to financial condition. 

110 See Birchler (2000) for a theoretical model that supports this point. 

111 See Shibut (2002), 25, for a discussion. See also Stojanovic, Vaughan,
 

and Yeager (2001); and Ashley, Brewer, and Vincent (1998).
 

112 Silverberg (1993) and Baer (2000); Bair (2001), Seidman (2001), Carnell
 

(2001), and Thomas (2001). Thomas recommended that deposit insurance
 

prices be adjusted for secured borrowing, but he did not specify how the
 

adjustment should be made.
 

FDIC BANKING REVIEW 19 2006, VOLUME 18, NO. 2 
The Liability Structure of FDIC-Insured Institutions 

from the FDIC to uninsured depositors (provided 

that the uninsured deposits remain in the bank at 

failure). Nevertheless, the FDIC assesses uninsured deposits even though they are unprotected 

at failure. On the surface, this appears to be 

patently unfair to these depositors—particularly 

since some banks pass assessment costs directly to 

depositors that receive no insurance protection.113 For this very reason, a number of countries use insured deposits for assessments.114 

However, most uninsured depositors do not lose 

money when a bank fails because they manage to 

withdraw their deposits and receive full payment 

beforehand. As the bank’s condition deteriorates, 

these funds are sometimes replaced by insured 

deposits or secured borrowing.115 This phenomenon is well documented: from 1990 to 2002, on 

average an estimated 22.8 percent of domestic 

deposits were uninsured, but during the same period only 1.5 percent of deposits at failed banks 

were uninsured and exposed to losses.116 To the 

extent that uninsured depositors flee troubled 

banks and banks respond by replacing the uninsured deposits with insured deposits or secured 

instruments, the inclusion of uninsured domestic 

deposits in the assessment base makes sense. 

Uninsured depositors’ preferred status under 

domestic depositor preference also provides some 

compensation for the assessments. In addition, 

the inclusion is easy to administer, for the distinction between insured and uninsured deposits is 

hard to make before failure. 

Some banks, however, rely so heavily on unprotected funds (including uninsured deposits) that, 

in the event of failure, many of the unprotected 

creditors will be unable to exit in time to avoid 

losses. These are typically wholesale banks, 

where the FDIC’s losses will be mitigated—or 

even wiped out—because other creditors will bear 

significant losses.117 For these banks, it may be 

unfair to charge assessments on uninsured 

deposits. In truth, their heavy reliance on unprotected funding sources may merit a discount on 

their assessments. 

General Trade Claims and Subordinated Debt 

Both general trade claims and subordinated debt 

are excluded from the assessment base. If a bank 

fails, both of them serve to reduce the FDIC’s 

losses, since the FDIC suffers losses only after 

these credits are wiped out.118 However, like 

uninsured deposits, many unsecured claimants are 

able to exit from banks (and thus receive full payment) before the banks fail. When this occurs, 

the unsecured claimants effectively “put” losses to 

the FDIC. To the extent that these creditors succeed in exiting from banks before failure, one can 

argue that they should be included in the assessment base. Longer-term credits (typically sub 

debt) or credits that are bank-specific (such as 

lawsuits) are less able to exit from a troubled bank 

and thus more likely to absorb losses at failure. 

As a result, there is less justification for including 

these debts in the assessment base. 

For credits that are likely to dodge losses at failure, one can argue that they should be included 

in the assessment base. Silverberg concludes that 

all borrowing except sub debt should be included 

because they all help to fund bad assets before 

failure but are not around to suffer losses at failure.119 However, both general trade claims and 

sub debt that remain in a bank at failure usually 

113 In testimony on deposit insurance reform, Mr. Nolan North of the Association for Financial Professionals made exactly that argument (2001). 

114 Garcia (2001), 86. 

115 The bank often shrinks as well. See Jordan (2000); Silverberg (1993); 

Marino and Bennett (1999); and Billett, Garfinkel, and O’Neal (1998). Jordan 

found that during the two-year period preceding failure, the failed banks that 

relied most heavily on uninsured deposits recorded dollar volume increases in 

small-denomination time deposits that exceeded the reduction in large-denomination time deposits. 

116 These are simple averages. The figures for failed banks include only banks 

where the FDIC imposed haircuts on uninsured depositors at failure. For additional evidence, see the section above on market discipline; see also Silverberg 

(1993); Jordan (2000); Marino and Bennett (1999); and McDill and Maechler 

(2003). 

117 Marino and Bennett (1999) discuss this phenomenon at length. 

118 Ceteris paribus. If these credits encouraged banks to take on additional 

risk or if they brought about a more lax supervisory stance, the result could 

differ. Most of the theoretical literature suggests that unprotected credits 

should encourage less risk taking; a notable exception is Blum (2002). There 

is little empirical evidence on the topic. For more detail, see the section 

above on market discipline. 

119 Silverberg (1993), 1. 

2006, VOLUME 18, NO. 2 20 FDIC BANKING REVIEW 
The Liability Structure of FDIC-Insured Institutions 

suffer a complete loss; moreover, these types of 

credits may also provide useful corporate governance services in the form of market discipline. 

Thus, the case for including these items in the 

assessment base is far weaker than the case for 

including secured credits. 

Other Considerations 

In focusing on the relationship between various 

types of liabilities and FDIC losses, we have 

looked at each type in isolation, but the distribution of these instruments across the industry is 

also important. In addition, the discussion so far 

has implicitly assumed that the current pricing 

method captures the FDIC’s risk exposure well— 

except for the treatment of bank liabilities. It 

turns out that adjustments to deposit insurance 

pricing are not nearly as straightforward as they 

first appear. 

Of the major types of liabilities used by banks, 

only uninsured deposits are relied on equally by 

large and small banks.120 Small banks rely much 

more heavily on insured deposits than large 

banks, and large banks are much heavier users of 

nondeposit liabilities. Unfortunately, no full 

breakout of nondeposit liabilities into secured and 

unsecured components is currently available. But 

even without full information on the status of 

nondeposit credits, it is clear than any significant 

adjustments will materially alter the distribution 

of assessments across the industry. The inclusion 

of secured credits in the assessment base, for 

example, would probably shift the funding burden 

toward large banks, whereas the exclusion of 

uninsured deposits would shift the burden toward 

small banks. In fact, the reason the FDIC in 

1935 advocated changing the assessment base 

from insured deposits to total domestic deposits 

was that the corporation thought the change 

would produce a fairer distribution of assessments 

across bank size.121 

Two aspects of bank size are not addressed in the 

current pricing method. First, the pricing matrix 

is designed to capture differences in the likelihood of failure, but not differences in the anticipated loss severity if failure occurs. The FDIC has 

historically suffered much lower loss rates from 

large banks than from small banks. From 1980 to 

2000, the average loss rate for banks under $100 

million was 22.4 percent; for banks over $10 billion, only 5.6 percent.122 The exclusion of loss 

severity from the pricing method means that large 

banks pay more, and small banks pay less, than 

expected losses. 

Second, the very largest banks pose unique challenges and risks to the FDIC. The least-cost resolution of some of these banks might pose a 

systemic risk to the financial system. If so, regulators might pay some creditors more funds than 

they would be entitled to under a normal resolution. To the extent that markets perceive these 

banks as “too big to fail,” the banks benefit from 

less-expensive and more readily available funding 

sources.123 Large banks also impose a great deal 

of concentration risk on the insurance funds. 

Even though the loss rates of these banks tend to 

be low, the size of the institutions alone is enough 

to threaten the solvency of the deposit insurance 

fund. For that very reason, private insurance 

firms generally do not accept this level of concentration risk. The appropriate pricing for concentration risk is not at all clear. 

120 As of year-end 2000, uninsured deposits made up 15.7 percent of the liabilities of banks with assets below $100 million, and 14.6 percent for banks 

above $10 billion. Thrifts, however, depended less on uninsured deposits for 

their funding. See Shibut (2002), 8. 

121 Bradley (2000), 10. 

122 Shibut (2002), 42. In recent years, however, very small banks have had 

the lowest loss rates, largely because of a few failures of fast-growing subprime lenders. See Salmon et al. (2003). Loss rates are calculated as a percentage of total failed-bank assets. 

123 The perception that the very largest banks are too big to be allowed to 

fail was particularly strong in 1984 after Continental Illinois failed and the 

Comptroller of the Currency testified that 11 banks were “too big to fail.” 

Since then, the perception has faded somewhat but not disappeared. For 

related analyses, see O’Hara and Shaw (1990); Billett, Garfinkel, and O’Neal 

(1998); Morgan and Stiroh (1999); and Flannery and Sorescu (1996). Note 

that FDICIA required that the incremental cost of a systemic-risk determination 

be paid through a special assessment. The special assessment would be paid 

on the basis of total liabilities excluding subordinated debt; therefore, large 

banks’ share of the special assessment would be larger than their share of 

regular assessments. Because the special assessment would be imposed only 

after the failure (and after the systemic-risk exception was invoked), large 

banks might well enjoy the benefits of a too-big-to-fail aura without ever paying extra for the privilege. 

FDIC BANKING REVIEW 21 2006, VOLUME 18, NO. 2 
The Liability Structure of FDIC-Insured Institutions 

In summary, the FDIC’s pricing method does not 

take into account differences in liability structure, 

even though these differences can materially 

influence the FDIC’s risk exposure. Moreover, 

liability structure is not the only aspect of the 

FDIC’s risk exposure that is excluded from the 

agency’s current pricing method: loss severity and 

concentration risk are excluded as well. Because 

of the interrelationships between liability structure and these other important (but thorny) 

aspects of deposit insurance, we believe that the 

incorporation of liability structure into deposit 

insurance pricing would probably be beneficial, 

but it would also require careful thought about 

multiple related issues. 

Failure Resolution Issues 

The movement away from deposit funding also 

has ramifications for failure resolution, raising 

issues associated with depositor preference and 

aggravating two operational challenges the FDIC 

sometimes faces when resolving failed banks. 

Domestic Depositor Preference 

In 1993, Congress passed the Omnibus Budget 

Reconciliation Act, which amended the Federal 

Deposit Insurance Act (FDI Act) and instituted 

depositor preference nationwide. The law states 

that when banks fail, deposit liabilities are to 

receive priority over general trade claims. Before 

the law was passed, deposits and general trade 

claims shared the same priority class.124 As the 

banking industry’s reliance on nondepository 

funding has increased, so also have the ramifications of this change. 

The change was not part of a banking bill, was 

made with very little debate, and has received relatively little attention in the United States since 

being enacted. However, questions have been 

raised about both the lack of deliberation before 

the provision was enacted and the change 

itself.125 Here we briefly review the questions and 

examine certain possible changes to depositor 

preference.126 

Background. In 1983, the FDIC advocated a 

national depositor preference statute as a means 

to increase market discipline, reduce the corporation’s costs, and permit the use of purchase and 

assumption (P&A) transactions for more failures.127 At the time, the FDIC was allowed to 

select any resolution method if it were less costly 

than a payout, but in the absence of depositor 

preference, use of a P&A agreement required the 

FDIC to satisfy all general trade claims. In depositor preference states, in contrast, the FDIC could 

execute a P&A agreement without satisfying all 

general trade claims (except for national banks 

located in the state). The FDIC found this to be 

an excellent way to reduce costs (particularly 

those associated with contingent claims related to 

lawsuits, loan guarantees, and loan commitments) 

while simultaneously simplifying the resolution 

transaction, minimizing the FDIC’s cash flow 

requirements, and reducing the scope of its liquidation operations.128 Large banks strenuously 

objected to depositor preference, arguing that it 

124 In 1993, 29 states had depositor preference laws, but these laws did not 

apply to national banks. See Curtis (2000), 243.
 

125 See Silverberg (1994) for an account of the events leading up to enactment of the change. The change was motivated by budgetary considerations.
 

In fact, we found no in-depth analyses of the depositor-preference provision
 

that came to a favorable conclusion. For criticisms, see the Shadow Financial
 

Regulatory Committee (1993); Ely (1993); Silverberg (1994); Bureau of National
 

Affairs (1994); Ratway (1995); Kaufman (1997); Marino and Bennett (1999);
 

and Curtis (2000).
 

126 There are other aspects of the payment priority order used in a receivership that might merit a review in light of recent changes in bank liability
 

structure. Failure resolution practices vary widely across the world, and there
 

are significant disagreements among economists and attorneys about the optimum policies. Although most of them are unrelated to bank liability structure,
 

one area of disagreement is related: the appropriate treatment of secured
 

credits. Some researchers argue that the use of collateral is unfair to general
 

(unsecured) claimants; others argue that creditors should be allowed to protect
 

themselves from loss by demanding collateral. For more general discussions
 

about issues related to the appropriate resolution policy for failed banks, see
 

Aghion, Hart, and Moore (1992); Contact Group on the Legal and Institutional
 

Underpinnings of the International Financial System (2002); and Hadjiemmanuil (2004).
 

127 See FDIC (1983, 1985) and Silverberg (1986).
 

128 Without the P&A transaction, the FDIC was required to execute a payout
 

transaction or an insured deposit payout, both of which required more cash at
 

resolution and more liquidation activity in the receivership. See Silverberg
 

(1986) for details.
 

2006, VOLUME 18, NO. 2 22 FDIC BANKING REVIEW 
The Liability Structure of FDIC-Insured Institutions 

would hinder their ability to compete with foreign banks and nonbanks in affected markets.129 

The Financial Institutions, Reform, Recovery and 

Enforcement Act (FIRREA) in 1989 explicitly 

allowed the FDIC to treat depositors differently 

from other general trade claimants at resolution.130 Therefore, the FDIC’s interest in depositor preference waned.131 Nonetheless, depositor 

preference was passed in 1993 for budgetary reasons.132 

Analyses and concerns. The priority status of 

claimants affects more than just the treatment of 

creditors once a bank fails. It also influences the 

behavior of the various stakeholders (creditors, 

banks, regulators) before failure, and it influences 

decisions about the method to use for failure resolution. Judgments about depositor preference 

should therefore consider the dynamic effects of 

the priority rules in light of appropriate policy 

goals. 

In discussing this issue, we find it helpful to look 

to the goals for bankruptcy proceedings. Aghion, 

Hart, and Moore articulated three generally 

accepted goals for bankruptcy proceedings: 

1. Maximize the ex post value of the firm. 

2. Distribute the firm value appropriately across
 

the claimants.
 

3. Preserve the ex ante bonding role of debt (that 

is, maintain the disciplinary role of debt and 

penalize the firm’s management).133 

Most observers agree that the appropriate distribution to claimants in a bank resolution is one 

that retains the statutory priority order in place at 

the time of failure. Because of the role banks play 

in facilitating commerce, many economists have 

articulated a fourth goal that applies to banks: the 

optimum treatment of a failing bank—particularly 

a large bank—should minimize the harmful 

effects to the overall economy. Disorderly or contracted proceedings that disrupt the bank’s ability 

to continue operations are more likely to cause 

harm to the overall economy.134 With these 

goals in mind, we review the literature on depositor preference and consider options for change. 

Birchler examined bankruptcy priority rules from 

a contract theoretic viewpoint; he found that the 

establishment of dual priorities (that is, depositor 

preference) is socially optimum, mainly because it 

reduces costly monitoring for senior claimants 

(that is, depositors).135 

Pages and Santos developed a theoretical model 

to examine the effect of depositor preference on 

the closure policy of the deposit insurer. Under 

depositor preference, the deposit insurer would 

close risky banks earlier (and at a more socially 

optimum time) than it would if all claims were 

given equal status. If the deposit insurer were a 

junior claimant, it would forbear much too long 

because it would have a stronger incentive to 

“gamble for resurrection.” Pages and Santos also 

found that the deposit insurer, as the senior 

claimant, would monitor healthy banks less than 

was socially optimum, but that as the junior 

claimant, it would not monitor unhealthy banks 

129 See U.S. Department of the Treasury (1991), III-17. FDIC (1989), 245–46,
 

also discusses the issue. The markets included letters of credit and other
 

guarantees and foreign deposits (if they were treated as general trade claims
 

in the statute). Silverberg (1994) echoed some of these concerns and concluded that large banks might incur costs (by forming separate banks in foreign countries or taking other protective measures) to address investor
 

concerns.
 

130 In 1988, the FDIC developed a rationale for paying general trade claimants
 

differently, as long as all claimants received at least as much as they would
 

receive under a liquidation. See FDIC (1989). At the request of the FDIC,
 

FIRREA explicitly codified that rationale into law.
 

131 See Curtis (2000) or Marino and Bennett (1999) for a more detailed discussion. Even so, the FDIC applauded passage of depositor preference at the
 

time (see Rehm [1993]). However, the treatment of foreign deposits might
 

not have been clear just then. In 1989, the FDIC stated that “on balance,”
 

FDIC authority to pay foreign and domestic depositors in full (while their
 

standing would remain the same as other general trade creditors under U.S.
 

bank receivership law) might be superior to depositor preference. See FDIC
 

(1989), 244–48.
 

132 The OMB estimated that depositor preference would reduce FDIC’s losses
 

by $750 million from 1994 to 1998. See Silverberg (1994). 


133 Aghion, Hart, and Moore (1992). 


134 See Hupkes (2000), especially p. 49 and 81, for additional discussion.
 

135 Birchler (2000).
 

FDIC BANKING REVIEW 23 2006, VOLUME 18, NO. 2 
The Liability Structure of FDIC-Insured Institutions 

frequently enough.136 However, Lutton and 

Becher argued that supervisory monitoring would 

increase under depositor preference because of 

heightened concerns about liquidity risk.137 

One rationale for depositor preference has certainly been to reduce costs for the deposit 

insurer.138 Barring any dynamic effects, depositor 

preference should achieve that goal. However, as 

described above in the section on market discipline, historical experience raises doubts about 

the amount of savings that depositor preference 

might produce in the United States. Both general trade claimants and uninsured depositors have 

been successful in shifting losses to the FDIC 

before failure. In addition, we found scant evidence that depositor preference had diminished 

the market discipline imposed by uninsured 

domestic depositors.139 On the basis of anticipated changes in the behavior of unprotected creditors, a number of economists have concluded that 

savings from depositor preference in the United 

States are uncertain, and possibly negative.140 It 

appears that savings from on-book creditors materialize primarily in situations in which either the 

bank fails suddenly (as in some fraud failures) or 

some claimants cannot exit from the bank quickly 

(long-term unprotected debt or contingent 

claims).141 To date, concerns about the ability of 

large banks to compete in markets associated with 

unprotected general claims do not appear to have 

been realized. From 1995 through 2005, foreign 

deposits have more than doubled; moreover, they 

grew a little more quickly than domestic deposits. 

It appears that most banks (even most large 

banks) have a large enough retail deposit base to 

allow most unprotected creditors to flee the bank 

before failure.142 

Several authors have found that domestic depositor preference would have troubling consequences 

if a multinational bank were to fail.143 Curtis 

found that as depositor preference is currently 

interpreted, it is inconsistent with international 

law because it effectively uses assets from all 

affected countries to satisfy domestic depositor 

claims ahead of foreign claims, thereby discriminating against all other nations. He then states 

the inevitable result: 

Insisting on the subordinate status of foreign 

deposits, while attempting to implement a single-entity liquidation of a U.S. multinational 

bank, would not be effective, as it is impossible 

to imagine that foreign regulators would allow 

it. The effect of such an attempt would simply 

be to force foreign governments to segregate the 

assets of branches in their countries for the benefit of claimants against those branches.144 

The practice of separating assets and claims by 

country at failure, commonly referred to as “ringfencing,” is entirely legal. The FDIC would have 

no authority whatsoever to prevent it. And 

except in rare circumstances, the financial incentives to ring-fence under domestic depositor preference are very strong. 

If a multinational banking organization were to 

fail and ring-fencing had been adopted, the FDIC 

might end up controlling the resolution process 

only for the assets and liabilities located in the 

United States.145 Planning and operations would 

136 Pages and Santos (2003); Kaufman (1997), 59. The prompt corrective
 

action (PCA) provisions of FDICIA may reduce (but not eliminate) the importance of incentives to close banks at the optimum time. The mandatory
 

examination schedule in the United States, and the fact that the FDIC is not
 

the primary federal supervisor for many banks, may reduce the importance of
 

the findings about the deposit insurer’s incentive to monitor banks.
 

137 Lutton and Becher (1994), Rehm (1993), and Kaufman (1997) also anticipated more liquidity risk for banks that were funded with unprotected credits.
 

For a more detailed discussion, see the section above on liquidity risk.
 

138 Birchler (2000), especially p. 3; Garcia (2001), 67; and Silverberg (1994).
 

This goal relates to the recoveries of one major creditor, rather than to the
 

overall recoveries associated with the value of the firm as a whole (the first
 

goal set forth by Aghion, Hart and Moore [1992]).
 

139 McDill and Maechler (2003) found that domestic depositor preference
 

resulted in a small increase in uninsured domestic deposits for most banks.
 

The effect was much smaller than the reduction in uninsured deposits associated with FDICIA.
 

140 Kaufman (1997); Thomson (1994); Silverberg (1994); Osterberg and Thomson (2003). One big difference between the savings associated with depositor preference in other countries and the savings associated with it in the
 

United States may relate to insurance limits. In some countries, insured
 

depositor preference has been coupled with a low insurance limit, a coupling
 

that facilitates low-cost deposit insurance.
 

141 See Shibut (2002), 14–16, for a discussion of the incentives and capacity
 

of claimants to exit from a troubled bank. See Silverberg (1994), 12–13, and
 

FDIC (1998), 662, for examples of large contingent claims.
 

142 Marino and Bennett (1999).
 

143 See especially Curtis (2000) and Marino and Bennett (1999), but also Silverberg (1986, 1994); Bovenzi (2002); and Marino and Shibut (2002).
 

144 Curtis (2000), 257.
 

145 It appears highly probable that the FDIC would lose control of foreign
 

assets and liabilities unless a systemic-risk exception were invoked and, at a
 

minimum, foreign depositors were paid more than they would receive under
 

the least-cost test.
 

2006, VOLUME 18, NO. 2 24 FDIC BANKING REVIEW 
The Liability Structure of FDIC-Insured Institutions 

be more uncertain, since the FDIC would not 

know which assets would ultimately fall under its 

control until after the failure.146 It is unlikely 

that the bank could be sold as a whole. There 

would probably be a scramble as governments 

sought to control the assets of the failed entity 

(with associated lawsuits and other overhead 

costs). Business lines that crossed international 

boundaries would be sold piecemeal, even if the 

aggregate values were higher. The liquidation 

process would be slower, so administrative costs 

would increase and more creditors would suffer 

liquidity losses.147 Because of these problems, the 

FDIC could lose more money under domestic 

depositor preference than it would have lost without depositor preference despite the benefits that 

depositor preference yields at domestic failures. 

For large international banks, ring-fencing would 

probably also exacerbate the market disruption 

associated with closure. The higher aggregate 

losses, the initial lack of certainty about the distribution of assets across receivership(s), and the 

necessarily piecemeal asset sales strategy could 

slow down the resolution process considerably 

and thus reduce market confidence. The uncertainty about the resolution process would probably compound the market disruption because it 

would hinder the FDIC’s ability to mitigate liquidity losses and payments-processing concerns 

through advance dividends to unprotected creditors.148 

Bliss cites some benefits of ring-fencing: it places 

assets at the disposal of the court that is most 

likely to control them; it provides a way—an 

admittedly crude way—to settle conflicts in laws 

and legal objectives; and it reduces the need for 

cross-border data sharing.149 Baxter, Hansen, and 

Sommer also find that ring-fencing improves 

supervisory incentives and may reduce the chance 

of costly forbearance.150 

Concerns about market disruption and the costs 

associated with ring-fencing might lead bank regulators to use the systemic-risk exception to the 

least-cost test if a bank with a large volume of foreign liabilities were to fail.151 Depending on the 

circumstances, use of the systemic-risk exception 

could hinder efforts to meet the third goal of 

bankruptcy cited earlier (the ex ante bonding role 

of debt) through market discipline. If regulators 

were to provide substantial relief to creditors, 

there would probably be a long-term reduction in 

market discipline at all large U.S. banks (with 

associated long-term losses in market efficiency 

and increased risk to the FDIC). 

The problems associated with ring-fencing would 

potentially disrupt the resolution of only a few 

banks since less than 1 percent of FDIC-insured 

banks hold foreign deposits. Moreover, most 

banks with foreign deposits have branches in only 

two countries; for these banks, both the costs and 

the disruptions of ring-fencing would probably be 

minimal. However, as of year-end 2003, the few 

global banks that do have branches in several 

countries hold more than 80 percent of foreign 

deposits and 30 percent of the assets of FDICinsured institutions. 

Options. There are at least four possible ways of 

treating depositors and general trade claimants at 

insolvent banks: 

1. Make no changes to the current priority order. 

2. Give priority status to all deposits (with foreign deposits remaining uninsured and excluded from the assessment base). 

146 The FDIC has recognized these problems repeatedly. See Marino and Bennett (1999); Bovenzi (2002); and Marino and Shibut (2002). 

147 See Contact Group on the Legal and Institutional Underpinnings of the 

International Financial System (2002), a study that was launched by the G-10 

deputies, for a discussion of the complexities of the bankruptcy proceedings 

of an international bank. See Marino and Shibut (2002) for a discussion of 

the FDIC’s resolution options for megabanks. See Baxter, Hansen, and Sommer (2004) for an alternative view. 

148 Both Kaufman and Seelig (2002) and Marino and Shibut (2002) emphasize 

the benefits of advance dividends as a means to reduce market disruption at 

failure. Garcia (2001) cites quick payments to insured depositors as a good 

practice for deposit insurers. However, with the FDIC’s costs associated with 

ring-fencing unclear until well after failure, the FDIC would be taking a substantial financial risk if it were to pay a large advance dividend at failure. 

149 See Bliss (2003), especially 51–52. 

150 Baxter, Hansen, and Sommer (2004). They cite additional reasons to prefer territoriality as well. 

151 If regulators decided that a systemic-risk determination was necessary 

regardless of the disruptions associated with ring-fencing, these concerns 

could lead them to provide more relief to creditors than they otherwise 

would. 

FDIC BANKING REVIEW 25 2006, VOLUME 18, NO. 2 
The Liability Structure of FDIC-Insured Institutions 

3. Give priority status only to insured deposits. 

4. Drop depositor preference altogether.152 

Each option has different strengths and weaknesses. In terms of enhancing market discipline and 

reducing insurance fund losses, the differences are 

clear for banks without foreign deposits: option 3 

is unquestionably the best, followed by options 1 

and 2, and lastly option 4. Recent changes in 

bank liability structure have probably expanded 

the differences among the options, but the degree 

of change is difficult to gauge. The differences 

are probably greatest for liquidity failures, unexpected failures, and failures where there is a large 

volume of contingent liabilities or long-term 

unprotected borrowing. For banks with foreign 

deposits, one cannot readily determine which 

option would most enhance market discipline or 

reduce insurance fund losses (although the question would be an excellent one for further study). 

For a few large international banks, the current 

preference order will limit the options of regulators in the event of failure. Regulators may be 

left with essentially two choices. First, they could 

run a series of territorial receiverships (separate 

proceedings in multiple countries), where market 

disruption could be significant, even systemic, 

because continuing the normal ongoing operations of the bank would be difficult or impossible. 

Creditor recoveries might suffer because of competition across countries and the lost franchise 

value, but market discipline would certainly be 

imposed. Second, regulators could try to avoid 

territorial receiverships by paying some general 

claimants (for example, foreign depositors) more 

than they would otherwise receive under the current depositor preference treatment.153 If the regulators succeeded, then the extent of market 

disruption would fall and the franchise value of 

the bank would be retained, but market discipline 

would be weakened and insurance fund losses 

might be larger. For banks with a substantial foreign deposit base, this option does a poor job of 

meeting the three goals stated above and has 

therefore been criticized by several researchers. 

Since the passage of FIRREA in 1989, no one has 

proposed this option. 

If priority status were provided to all deposits 

(option 2), the financial gains from ring-fencing 

would be significantly reduced and U.S. banking 

regulators would be in a better position to contain 

systemic risk while still imposing losses on unprotected creditors. On the basis of a legal analysis 

and concerns about ring-fencing, Curtis recommended that the FDIC choose this option by 

changing its interpretation of the statute.154 

In terms of the likelihood of ring-fencing, option 

3 (insured depositor preference) probably falls 

between options 1 and 2. If a large international 

bank had relatively few insured deposits and a relatively low loss rate, the financial benefits of ringfencing would be small; in other circumstances, 

the benefits (and thus the likelihood) of ringfencing would increase. Under option 4 (the 

elimination of depositor preference), the incentives for ring-fencing would probably be similar to 

those under option 2 (all-depositor preference). 

Option 3 (insured depositor preference) would 

probably raise concerns about fairness within the 

United States.155 To the extent that investors 

assume that large banks are too big to fail and 

therefore that large banks have de facto complete 

insurance coverage, small banks have a disadvantage in competing for uninsured deposits. When 

the FDIC was created in 1933, insured depositor 

preference was enacted at the same time, but in 

1935 it was revoked precisely because of concerns 

that it was unfair to small banks. Option 2 (alldepositor preference without deposit insurance for 

152 This list is not exhaustive. For example, Silverberg (1986) discussed ringfencing and concluded that foreign deposits should be treated the same as 

domestic deposits in all respects (including deposit insurance and assessments). However, we excluded that option from our discussion because Congress deliberated on the insurance status of foreign deposits during the 

hearings that led up to FDICIA and rejected equal insurance treatment for 

them out of concern that that would harm the competitiveness of large U.S. 

banks abroad (see Curtis [2000]). Another option might be to give contingent 

claims a lower priority than other general trade claims, and place deposits and 

general trade claims in the same priority. 

153 However, some countries might still ring-fence, regardless of any clear 

financial incentive to do so. For example, Japanese law requires ring-fencing. 

The only option that would avoid all ring-fencing with complete certainty is 

open-bank assistance. 

154 Curtis (2000), especially 262. 

155 See Garsson (1993); Lutton (1994): and Marino and Bennett (1999). 

2006, VOLUME 18, NO. 2 26 FDIC BANKING REVIEW 
The Liability Structure of FDIC-Insured Institutions 

foreign deposits) might also raise concerns about 

competitiveness across banks in the United 

States. 

In conclusion, analyses of the optimum insolvency priority order for U.S. banks are scarce, and no 

consensus on the best approach has been reached. 

However, there is a consensus that the current 

insolvency priority order could cause very serious 

problems if a large international bank were to fail 

in the future. We recommend a thorough study 

of the issues rather than specific changes. Perhaps the best approach would be to commission a 

U.S. interagency group to study the options in 

more depth and make recommendations, or to 

have an international group tackle the research 

question and the difficult task of harmonizing the 

treatment of creditors at insolvent international 

banks.156 After the options are studied more 

carefully, any recommended changes should be 

pursued promptly, while the banking industry is 

healthy and time is available for a reasoned 

debate. 

Operational Issues 

Depositor preference is not the only failure-resolution area affected by changes in bank liability 

structure. The movement away from deposit 

funding aggravates two operational challenges the 

FDIC sometimes faces when resolving failed institutions: one concerns situations when the FDIC 

has little or no advance warning of failure, and 

the other concerns FHLB advances. 

When most banks fail, the FDIC has advance 

warning that failure is imminent. There is 

enough time to prepare, and the FDIC normally 

has some flexibility in selecting the failure date. 

Thus, most failures occur on a Friday, and most 

insured depositors have access to their funds on 

the following Monday. Often the FDIC has time 

before failure to perform some of the insurance 

administration and quietly arrange for the sale of 

at least some (and sometimes almost all) of the 

failed bank’s assets. 

The situation changes if a troubled bank relies 

heavily on unprotected credits (either uninsured 

deposits or general trade claims) for funding and 

then fails. In this case, the timing of the failure 

may well be determined by the creditors, as they 

attempt to exit from the bank and the bank’s liquidity dries up. The FDIC may have little or no 

time to prepare for failure. The possibility of such 

liquidity failures poses significant operational 

challenges for the FDIC, particularly if the bank 

is large. 

The changes in bank liability structure may have 

increased the likelihood of liquidity failures in the 

future. If so, liquidity failures will still occur less 

often than the typical capital-driven failure,157 

but the combination of more unprotected funding 

plus a more concentrated industry will be a continuing challenge for the FDIC. 

A second issue arises from FHLB advances. From 

1992 to 2002, outstanding FHLB advances at 

commercial banks increased fivefold. The 

advance contracts almost always impose prepayment penalties. The FDIC has routinely paid 

these penalties to facilitate a quick sale of the 

institution’s assets, but this policy has sometimes 

been expensive. When the Bank of the Alamo 

failed in 2002, the prepayment penalties amounted to 14 percent of the outstanding balance of 

advances. This is an area where the FDIC may 

want either to seek relief from prepayment penalties (perhaps by avoiding prepayment through 

guaranteeing the advances in exchange for the 

collateral, perhaps by seeking legislative remedies) 

or to reconsider its standard policy of prepaying 

advances in order to facilitate asset sales. 

156 In recent years, several efforts have been made to harmonize bank insolvency laws. Because of different philosophies, such negotiations are difficult. 

Even so, there have been some successes. In 2001 the European parliament 

passed the Winding-up and Reorganization Directive (which provides for a 

more coherent treatment of banks headquartered in the European Union), and 

several countries in Europe have adopted its provisions. In addition, many 

countries have adopted “carve-out” provisions for derivatives that follow harmonized netting agreements recommended by the International Swap and 

Derivatives Association (ISDA). See Contact Group on the Legal and Institutional Underpinnings of the International Financial System (2002) for an excellent discussion of the issues involved and the harmonization efforts to date. 

157 Many researchers have found that most liquidity failures are, at bottom, 

capital failures as well. Unprotected creditors do not usually exit en masse 

from banks that are unquestionably in sound condition. Even if they do, such 

banks can normally arrange for alternative financing. 

FDIC BANKING REVIEW 27 2006, VOLUME 18, NO. 2 
The Liability Structure of FDIC-Insured Institutions 

Summary 

Bank deposit growth has not kept pace with the 

growth in bank assets. As a result of the deposit 

shortfall, bank management has looked to alternative funding sources. We describe the events 

that led to the gap between asset growth and 

deposit growth, describe some of the ways bankers 

are addressing the shortfall, and conclude that 

banks will continue to need alternative funding 

sources since future deposit growth is not likely to 

meet banks’ future funding needs. 

Consequently, banks must continue to adapt the 

way they manage their liability structure. Because 

banks are relying more heavily for funding on 

wholesale funding sources and rate-sensitive 

deposits, liquidity risk exposure has increased and 

liquidity management has become more important—and more complex—for banks. 

Changes to a bank’s liability structure raise several issues for banking regulators. The one that has 

received the most attention recently is market 

discipline—particularly for large, complex banking organizations. The research to date shows 

that unprotected investors monitor bank performance and respond to changes in risk exposure. 

Supervisors play an important role in ensuring 

that markets have accurate data on banks, since 

troubled banks otherwise tend to overstate capital. The evidence is weaker when it comes to the 

ability of markets to encourage banks to reduce 

their risk exposure when troubles arise. We 

expect that in the future, the disclosure of information to markets will receive more emphasis and 

the use of market data to inform and enhance the 

supervisory process will increase; market data may 

be incorporated into future deposit insurance 

pricing mechanisms as well. 

Regulators have responded to the additional complexity of bank liability management by making 

several updates to their examiner guidance on liquidity risk. Regulators might want to weigh 

whether further action is necessary in order to 

better monitor the increasing use of wholesale 

funding. It may also be worthwhile for regulators 

to seek better ways of measuring liquidity risk. 

An additional issue for banking regulators is 

whether the FDIC’s insurance-pricing mechanism 

should be changed so that it better captures the 

relationship between bank funding strategies and 

the FDIC’s risk exposure. We summarize the 

rationale for change and find that the relationship among funding strategies, bank size, and fund 

exposure is too complicated for there to be any 

easy solutions. 

Finally, we discuss issues that center on failure 

resolution: domestic depositor preference and 

operational matters. Changes in liability structure have highlighted the importance of priority 

status when banks become insolvent. Economists 

have questioned the cost savings attributed to 

domestic depositor preference as well as the 

effects if a multinational bank were to fail. We 

describe the effects of four options and recommend further research—with prompt pursuit of 

the appropriate changes—while the banking 

industry is healthy and time is available for a reasoned debate. Changes in liability structure may 

also have two other effects on failure resolution: 

they may decrease the amount of preparation the 

FDIC can do before failure, and they may affect 

the way the FDIC handles FHLB advances at 

failed banks. 

2006, VOLUME 18, NO. 2 28 FDIC BANKING REVIEW 
The Liability Structure of FDIC-Insured Institutions 

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FDIC BANKING REVIEW	 37 2006, VOLUME 18, NO. 2 
The Resolution Trust Corporation and
 

Congress, 1989–1993 

PART I: 1989–90 

Lee Davison* 

Policymaking is forever a work in progress, balancing 

the concerns of the regulated with the interests of society, and making adjustments as new imbalances 

inevitably arise. Good policy begins with good supporting legislation, and the process of making these 

laws leaves behind a rich trail of lessons for the 

future. This article looks back at an important episode 

involving the FDIC—the creation and operation of 

the Resolution Trust Corporation (RTC)—and highlights the political give-and-take that is often necessary 

to craft important legislation. The legislative history of 

the RTC, reflected both in the consequences of the 

statute that created it and in debates over subsequent 

legislation concerning the agency, was affected by the 

unique use of taxpayer dollars to protect insured 

depositors at failed thrifts. Readers should note, however, that this article only tangentially examines 

everyday RTC operations, which often (though not 

always) proceeded largely unaffected by the debates 

over the RTC’s management structure and funding 

that were central to the legislative debate. When the 

RTC started its work, hundreds of insolvent thrifts 

needed to be closed, their insured depositors protected, 

and their assets returned to the private sector. Hundreds more would fail after the RTC opened, and in 

all, the RTC would resolve 747 failed thrifts and dispose of more than $450 billion in failed thrift assets 

before closing, a year earlier than originally planned, 

in 1995. The RTC successfully accomplished the 

broad public policy goals set out for it in 1989. The 

legislative story does, however, provide a window into 

understanding the environment in which the RTC 

operated. Readers interested in more details on the 

RTC’s operations may want to consult the FDIC’s 

study, Managing the Crisis: The FDIC and RTC 

Experience 1980–1994 (1998). The legislative history of the establishment of the RTC, “Politics and 

Policy: The Creation of the Resolution Trust Corporation,” appeared in Banking Review 17, No. 2 

(2005). The continuation of that legislative history, 

covering the years 1989–1993, is presented in two 

parts: Part I appears here; Part II will follow in an 

upcoming issue. —Editor’s note. 

* The author is a historian in the FDIC’s Division of Insurance and Research. 

The author would like to thank Tim Critchfield, Timothy Curry, Alice Goodman, 

Matthew Green, Jack Reidhill and Lynn Shibut for their helpful comments and 

suggestions. Any errors are, of course, the responsibility of the author. 

2006, VOLUME 18, NO. 2 38 FDIC BANKING REVIEW 
The Resolution Trust Corporation and Congress, 1989–1993 

The statute that created the Resolution Trust Corporation (RTC) in 1989—the Financial Institutions Reform, Recovery, and Enforcement Act of 

1989, or FIRREA—spelled out the agency’s mandate with a good deal of specificity, even providing 

a date for the agency’s shutdown just six years from 

its opening.1 Such specificity, as well as the size of 

the initial funding ($50 billion), indicated that the 

agency would get a good deal of congressional 

attention. Nevertheless, given FIRREA’s detailed 

content and the short time horizon it set for the 

RTC, one might think that a history of RTC-related legislation in the years after FIRREA would be 

relatively brief. One would be wrong. In each of 

the four congressional sessions from 1990 through 

1993, significant RTC legislation was proposed or 

enacted: in 1991 two RTC laws were passed, and 

in 1993 another one was;2 in 1990 and 1992 Congress considered but failed to pass RTC legislation. 

Broadly speaking, during the life of the RTC Congress repeatedly sought to address two main issues. 

The first, and one that Congress found particularly 

hard to confront, was that of additional RTC funding. It quickly became apparent that the $50 billion provided by FIRREA in 1989 would prove 

inadequate. And when Congress did muster the 

political will to appropriate more funds (twice in 

1991), those funds, too, proved insufficient 

(according to estimates at the time). Legislation 

providing still more funding did not pass until 

1993. The second main issue that Congress 

repeatedly sought to address was that of the management and operation of the RTC. This broad 

issue encompassed a whole range of smaller ones, 

including management structure, methods and 

speed of disposing of assets and resolving failed 

institutions, contract oversight, provision of affordable housing, and the hiring of minority firms to 

do RTC work. These issues of management and 

operations were debated in the context of each 

major bill. 

The debates leading to the passage of FIRREA had 

not been marked by overt partisanship (except for 

the arguments over budgetary treatment of RTC 

funding). Once the RTC was in existence, however, it was a highly visible part of the George H. W. 

Bush administration and a target for congressional 

critics, most often from the opposing party. A year 

after the RTC had been created, one observer 

noted that “the RTC can’t make a move without 

somebody in Congress taking a shot at them . . . 

it’s like being in a giant fishbowl where people not 

only look at you, but they line up along the sides, 

take harpoons, and start throwing them at you.”3 

By 1992, the unpopularity of voting funds for the 

RTC meant that it had become hard to get even 

Republican support for the RTC’s funding needs, a 

situation exacerbated by the election of a Democratic president in 1992. But although the debates 

on proposed RTC legislation were often highly 

politicized, they were also substantive and demonstrate that Congress was attempting to make major 

and minor adjustments in an agency with vast 

responsibilities that had been started from scratch 

in 1989 and was expected to operate effectively 

under intense scrutiny. 

Post-FIRREA Issues (1989–1990) 

The RTC’s early operations (1989–90) were of 

great interest to many in Congress and generated 

much activity both in the legislature and within 

the administration. Although none of the legislation proposed during this period succeeded, the 

debates as well as the failed bills they accompanied 

contributed to the substance of the legislative 

1 As enacted, FIRREA made the RTC a limited-life (the corporation was to 

terminate by year-end 1996) entity that would manage and resolve all formerly 

FSLIC-insured institutions placed under conservatorship or receivership from 

January 1, 1989, through August 9, 1992. As of the date of enactment, the 

RTC was to succeed the Federal Savings and Loan Insurance Corporation 

(FSLIC) in its role as conservator or receiver of any institution. General 

oversight of the RTC was vested in an Oversight Board, which was to direct 

the RTC’s overall policy, but operational control would rest with the RTC itself. 

The Board of Directors of the FDIC was to serve as the RTC’s Board of 

Directors. (FIRREA expanded the FDIC’s Board from three to five members, 

adding the head of the Office of Thrift Supervision (OTS) and a member to be 

nominated by the president). The FDIC would be the RTC’s “exclusive 

manager.” For a detailed discussion of the creation of the RTC, see Lee 

Davison, “Politics and Policy,” FDIC Banking Review 17, no. 2 (2005). 

2 In 1991, Congress passed the Resolution Trust Corporation Funding Act of 

1991 (Public Law 102-18) and the Resolution Trust Corporation Refinancing, 

Restructuring and Improvement Act of 1991 (Public Law 102-233). In 1993, it 

passed the Resolution Trust Corporation Completion Act of 1993 (Public Law 

103-304). 

3 Steve Klinkerman, “The High Road Is Costing the RTC Time and Money,” 

American Banker (August 16, 1990). 

FDIC BANKING REVIEW 39 2006, VOLUME 18, NO. 2 
The Resolution Trust Corporation and Congress, 1989–1993 

changes that would be enacted in 1991 and illustrate the terms of the debates about the RTC overall. 

During 1989–1990 three areas were most important: the first was general and multifaceted, combining concerns about the perceived slowness of 

the RTC’s startup with concerns as to whether the 

bureaucratic structure outlined by FIRREA would 

be able to handle its appointed task. In a sense, 

this first area could be taken to include almost any 

of the agency’s activities, but generally the concerns focused on the speed and manner of resolution and asset disposition. The other two areas 

were quite specific and dealt mainly with money— 

the bottom line of most of the debates over the 

RTC. The first of these was the need to provide 

the agency with working capital, and the second 

was the need to provide the agency with additional 

loss funds as it became clear that the money allocated under FIRREA would prove insufficient. 

(Both of these issues became embroiled in the partisan debate over the federal budget at a time 

when the deficit was a political lightning rod.)4 

Because the inadequacy of loss funding was not of 

immediate concern in the early months of the 

RTC’s existence, this section will examine only 

the early criticisms of RTC operations and the 

debates over the provision of working capital. 

Speed 

Questions about whether the RTC was moving fast 

enough both to resolve institutions and to sell 

assets began almost immediately. Expectations for 

the RTC were high—unrealistically so. The decision to confront the thrift crisis had been 

announced in February 1989; the concept of the 

RTC had therefore been present for six months 

before its August creation. Somehow, despite the 

obvious challenges facing it, many observers felt 

that results should have been expeditious.5 The 

RTC’s management knew this. During deliberations in August about some of the first resolutions 

of failed institutions, RTC Chairman L. William 

Seidman noted, “I think the worst thing we can do 

now is not move forward quickly. . . . Mr. Brady 

[Nicholas Brady, secretary of the treasury] has said 

. . . that we’re going to do them tomorrow, and if 

we don’t, that’s big news, . . . the kind of news the 

White House doesn’t like to hear.”6 But although 

the FDIC, in consultation with other agencies, had 

been readying itself for the task of taking on the 

RTC, not until July was its precise role clear.7 In 

any case, expecting the RTC to simply start work 

as if it had been in existence for years was unrealistic. As former FDIC Chairman William Isaac 

would note before Congress in the spring of 1990, 

“The scale of the RTC’s undertaking is breathtaking. The RTC is in the process of creating, from 

scratch, virtually overnight, the world’s largest 

financial institution, all of whose assets are troubled.” Isaac believed it would take the better part 

of a decade for the RTC to accomplish its goals.8 

In terms of resolutions, between August 9 and September 30 the agency resolved 24 institutions, but 

during the final quarter of the year it resolved only 

another 13, and during the first quarter of 1990 

only another 15. To put this in perspective, by 

August 8, 1989, the day before the RTC came into 

existence, there were 262 failed thrifts in conservatorship that the agency would inherit and an additional 140 institutions would fail by the end of the 

4 It is, of course, impossible to divorce the issues of working capital and loss
 

funding from the question of management: in mid- to late 1990, the
 

expectation and then the reality of imminent shortfalls placed considerable
 

constraints on the agency’s ability to carry out its work. In short, there was
 

no way the RTC could make continued significant progress without the
 

necessary underpinning of adequate working capital and loss funds.
 

Nevertheless, the lack of funds and the RTC’s response to it contributed to
 

criticism, even if the funding problem was beyond the agency’s control. And
 

criticism of the RTC in general could mean a multitude of things. The
 

criticism might be directed at the agency itself, by the public or Congress, or
 

the criticism might be aimed not specifically at the RTC but at the
 

administration’s conduct (whether exemplified by the Oversight Board or by the
 

Treasury) or at “the bailout,” with varying degrees of specificity or breadth.
 

Although some detractors aimed their criticism precisely, many others did not. 


5 John Murphy, former FDIC general counsel noted, “Let’s face it, the
 

legislation has been percolating for six months . . . [and] now that it has
 

bubbled to the surface, people will be expecting prompt action” (Steve
 

Klinkerman, “All Eyes Are on Seidman to Move Fast and Smart on Thrift
 

Cleanup,” American Banker [August 10, 1989]).
 

6 RTC Board of Directors Meeting, August 9, 1989.
 

7 See Davison, “Politics and Policy.”
 

8 Robert Trigaux, “RTC Must Rely on Sales Mentality for Its Role in Bailout to
 

Succeed,” American Banker (May 9, 1990). Many observers were more
 

impatient than Isaac, but pessimists were far less sanguine than he about the
 

RTC’s prospects: in October 1989, John Oros, a partner at investment banking
 

company Goldman Sachs, declared it likely that “our grandchildren will be
 

buying assets from the RTC” (“5-Year RTC Cleanup Called the “Big Lie,”
 

National Mortgage News [October 2, 1989]).
 

2006, VOLUME 18, NO. 2 40 FDIC BANKING REVIEW 
 

The Resolution Trust Corporation and Congress, 1989–1993 

first quarter of 1990.9 (See Figure 1 for the number 

of conservatorships and resolutions during the 

agency’s existence.) By early 1990, the volume of 

criticism, particularly from House Democrats, had 

begun to rise significantly. Rep. Bruce Vento said 

he thought the RTC had failed to hit the ground 

running and it was “not too early to suggest that 

they should be doing more.” He noted that the 37 

resolutions carried out in 1989 had been “deposit 

sales, not really the sale of institutions, and they 

were not very complicated deals.”10 Rep. Frank 

Annunzio stated that the RTC “has spent more 

time posturing for more money than in using what 

they have.”11 

No matter where one stood with regard to the 

RTC’s performance, it was clear that the agency 

was not resolving failed thrifts at a rate that kept 

pace with the growing number of thrifts in conservatorship (institutions in conservatorship still 

operated, but were under RTC control). The 

RTC’s most obvious response to the criticism was 

the so-called Operation Clean Sweep announced 

by Seidman in March 1990. Designed to assuage 

critics, restore the RTC’s credibility in the eyes of 

potential acquirers, and demonstrate progress, this 

ambitious plan called for 141 resolutions by the 

end of June. The agency exceeded this goal, 

resolving 155 institutions with total assets of $44.4 

billion in just three months.12 

Although Operation Clean Sweep might have 

mollified critics of the resolution process, it made 

Figure 1 

Number of Institutions Taken Over and
 

Resolved by the RTC, 1989–1995
 

Number of Institutions 

350 

318 315 

300 

250 

1989 1990 1991 1992 1993 1994 1995

232 Takeovers 213 Resolutions 200 

Total Number of Institutions = 747 

144 150 

100
 

69
 64
 

50
 

59 

37 27 9 2 2 3 0 

the asset-disposition part of the agency’s task more 

difficult by adding substantially to the RTC’s 

inventory of assets, particularly problem assets. 

And in fact, the agency’s strategy for disposing of 

its inventory at first (and also later) provided fertile ground for disapproval. During the debate on 

passage of FIRREA, most concerns had centered 

on the idea that the RTC would move too quickly 

to sell off assets (particularly real estate), swamping 

an already severely depressed market, especially in 

the Southwest. These fears persisted during the 

agency’s early days. Sen. Phil Gramm of Texas 

stated that if distressed thrifts’ assets were disposed 

of too quickly, the effect might be to “bankrupt 

every healthy bank and thrift left [in the Southwest].”13 The RTC was certainly aware of these 

fears. RTC Board member Robert Clarke, during a 

discussion in October 1989, noted that “there has 

been so much sensitivity to this issue of dumping. 

And people are going to be, as you know all too 

well . . . really be looking . . . closely.”14 

Once the RTC was operating, however, the fear of 

dumping was gradually replaced by the fear that 

the RTC was not moving quickly enough to divest 

itself of the assets of resolved institutions.15 By 

mid-1990, with the inventory of assets rising and 

the prospect of more to come, many people realized that if the agency did not move assets quickly, 

it would never finish the job. In addition, people 

had come to believe that the only way to return 

real estate markets to normal was to get RTC properties back into the private sector. Ken Guenther 

of the Independent Bankers Association noted, 

“The attention has shifted from dumping to speeding up the disposition process . . . in some markets, 

9 Resolution Trust Corporation, 1989 Annual Report (1991), 51–55 and Annual 

Report 1990 (1991), 87-88.
 

10 It should be noted that the RTC’s management was inclined to do more
 

complicated deals, but the Oversight Board’s cautious attitude inhibited such
 

activity.
 

11 Robert M. Garsson, “Vento Urges Abolition of RTC Oversight Board,” “Tough
 

Scrutiny Ahead for RTC,” and “Banking Panel Faults Bush on Pace of S&L
 

Resolutions,” American Banker (January 8, 22, and 24, 1990). For the
 

debate over working capital, see the relevant section of this article. 


12 FDIC, Managing the Crisis (1998), 127.
 

13 Steve Klinkerman, “Southwest Fears Impact of Real Estate Liquidation,”
 

American Banker (August 16, 1989).
 

14 RTC Board of Directors Meeting, October 24, 1989.
 

15 Seidman noted in January 1990 that “on one side are the anti-dumpers, on
 

the other side are the fast sellers” (Robert D. Hershey, Jr., “Savings Rescue
 

Cost Seen Rising,” New York Times [January 25, 1990]).
 

FDIC BANKING REVIEW 41 2006, VOLUME 18, NO. 2 
The Resolution Trust Corporation and Congress, 1989–1993 

nothing will stabilize until we get rid of the overhang of RTC properties.”16 Texas congressmen 

were complaining that the RTC was moving too 

slowly—at a “snail’s pace.”17 

As the need for swift action began to outweigh 

fears of dumping, constraints that FIRREA had put 

on the RTC (and especially the agency’s interpretation of the requirements for selling assets in “distressed areas”)18 came under fire. In June 1990, 

with the expected costs of the thrift rescue escalating and the argument becoming more partisan, 

House Democrats’ condemnations of the agency’s 

methods became more pointed. Rep. Vento told 

Treasury Secretary Brady, “There is an appearance 

to many of us that the RTC is floundering and the 

oversight board isn’t doing what it can. It’s simply 

not moving the assets.”19 

To facilitate speedier sales of assets, the RTC began 

to alter its asset-disposition policies. For example, 

in early May 1990, it decided to adopt a more flexible approach to real estate sales in distressed 

areas.20 By June it began to move toward a policy 

of using bulk sales to rid itself of at least some of its 

asset inventory. Though there was opposition to 

this strategy as creating a lack of competition 

among bidders (and as handing “sweetheart deals” 

to large investors), possibly lowering asset sale 

prices because of attendant discounts, and possibly 

hurting some real estate markets, such concerns 

were largely trumped by the desire to get assets 

moved out of the RTC quickly.21 Undoubtedly 

the changes were to some extent a response to 

clamor in Congress, but they were much more a 

function of the newly created agency’s finally getting some experience under its belt and responding 

to the marketplace. In the area of asset-disposition 

policy and practice as in the area of resolutions, 

demonstrable change was a response both to public 

debate and to experience. 

Management Structure 

Both resolutions and asset disposition were 

embroiled in debates about the RTC’s management structure, which for Congress became one of 

the more contentious elements of the thrift 

cleanup. The most visible issue was the relationship (as created by FIRREA) between the Oversight Board and the RTC. Though ostensibly the 

two bodies worked together, they had different 

purposes. The RTC was an operational entity, run 

by its own board of directors, with a mission primarily of resolving institutions and selling assets. The 

Oversight Board was a policy and watchdog entity 

with a mission of setting the general policies under 

which the RTC would accomplish its goals, controlling the purse strings, and keeping watch on 

the use of taxpayer funds; it was not to intrude too 

deeply into RTC operations.22 Seidman at one 

point described the RTC as the body and the 

Oversight Board as the mind. On the surface this 

division of function might seem fairly straightforward: the Oversight Board would set policy, and 

the RTC, working within those policies and therefore in accordance with the Oversight Board’s 

directives, would do its job. The operational reality, however, was much more complex. 

A complicating factor was the existence of two sets 

of personnel with different viewpoints and experience. (It should be noted that this discussion is 

based primarily on certain RTC materials and the 

public debate; unfortunately, equivalent internal 

16 Steve Klinkerman, “RTC’s Aggressive Policy Garners Favorable Reviews,” 

American Banker (April 3, 1990).
 

17 “RTC Too Slow in Disposing of Real Estate Assets,” National Mortgage
 

News (April 16, 1990).
 

18 See U.S. House Committee on Banking, Housing, and Urban Affairs,
 

Subcommittee on Financial Institutions Supervision, Regulation and Insurance,
 

Resolution Trust Corporation Task Force, Disposition of Assets (May 4, 1990),
 

30. Fears of asset dumping and potential damage to local real estate markets 

had prompted legislators to add a provision in FIRREA requiring that the RTC 

not sell property in those areas for less than 95 percent of the market value 

established by the RTC. 

19 Stephen Labaton, “Savings Debate Gets Partisan Tone,” New York Times 

(June 15, 1990). 

20 By then the RTC had its own market experience to go on and could lower 

an asset’s market value by taking this experience into account: if it had not 

been able to sell a property after six months (four months for residential 

properties), the market value could be lowered by up to 15 percent; if the 

property continued unsold for another three months, the market value could 

be lowered by another 5 percent. If the property still remained unsold, it 

would be reappraised, but the market value would not be raised if the 

reappraisal was higher than the most recent market value set by the RTC 

(Paulette Thomas, “Resolution Trust Corporation to Slash Prices of Hard-to-Sell 

Realty from Sick S&Ls,” Wall Street Journal [May 9, 1990]). 

21 Paul Duke, Jr., “Bailout Officials Set Plan to Sell S&L Real Estate—Stockpile 

Would Be Sold in $500 Million Chunks over the Next Few Years,” Wall Street 

Journal (June 11, 1990). 

22 For example, individual transactions were not part of the Oversight Board’s 

purview. 

2006, VOLUME 18, NO. 2 42 FDIC BANKING REVIEW 
 

The Resolution Trust Corporation and Congress, 1989–1993 

Oversight Board materials were unavailable. Oversight Board members and staff doubtless held their 

own views on the Board’s relationship with the 

RTC.) The RTC was essentially run by FDIC staff 

and executives while the Oversight Board had a 

strong Treasury Department component and so 

represented the administration’s point of view. 

The FDIC was an independent agency with experience in financial institution failures and resolutions, and its board was accustomed to being able 

to adjust policies to suit its needs. Moreover, the 

FDIC’s insurance fund came not from the taxpayer 

but from premiums paid by banks. The Oversight 

Board members, who had other time-consuming 

posts, would be able to spend relatively little time 

on RTC business, and both they and their staff, 

though experienced in banking, housing, or real 

estate development, had to come to grips with a 

new organization.23 However, with substantial 

taxpayer money involved, it was appropriate for 

the administration to be involved in how the RTC 

accomplished its goals. 

This bifurcated structure was a recipe for conflict. 

Each entity might genuinely believe it was pursuing the best course available, but the two did not 

necessarily share a single vision. What the Oversight Board perceived as a “general policy,” the 

RTC might see as an operational matter.24 There 

was constant tension over who had the power to 

make decisions and concern about perceptions of 

who was responsible for results. 

Although FIRREA demanded that the Oversight 

Board create general policies, RTC executives 

thought the Oversight Board was attempting to 

write a set of rules for a process that was ill-suited 

to being governed by rules.25 In these executives’ 

experience, judgment had to be applied in the 

making of decisions, but the politics of the S&L 

cleanup had led to statutory mandates as well as 

Oversight Board authority constraining the ability 

to make such judgments. Moreover, the RTC’s 

executives believed that the need for the Oversight Board to overcome the difficulties of starting 

from scratch further complicated matters. The 

RTC would, of course, have to follow Oversight 

Board policy (although the agency could and did 

seek to change that policy); Seidman warned RTC 

staff specifically not to exercise judgment but to 

follow the rules. Although FDIC staff had previously had more flexibility, Seidman noted, “we 

didn’t [previously] have a statutory standard and 

we didn’t have anybody upstairs to raise the issue 

about how we were operating.”26 

As the RTC began its work, the officials involved 

sounded conciliatory notes about this somewhat 

cumbersome relationship. Treasury Secretary 

Brady said it would be a “cooperative effort.” Seidman publicly predicted a good working relationship with the Oversight Board.27 Tension, 

however, was present from the outset. The RTC 

wanted to move immediately to sell five institutions but the Oversight Board prevented it from 

doing so, believing that the transactions were too 

complicated inasmuch as many key policies had 

not yet been formulated.28 RTC Executive Director David Cooke stated that the Oversight Board 

had asked the RTC to “stay with fairly simple, 

small transactions” until policies could be determined; he said, diplomatically, that he did not 

mind this since the organization was just getting 

on its feet.29 

23 As structured by FIRREA, the Oversight Board had five members. Three of 

these were government officials: the Secretary of the Treasury (Nicholas 

Brady, who served as the board’s chairman), the Chairman of the Federal 

Reserve Board (Alan Greenspan), and the Secretary of Housing and Urban 

Development (Jack Kemp). The other members were individuals to be 

nominated by the president and confirmed by the Senate. The first such 

members were Philip Jackson (a former Fed governor) and Robert Larson (the 

CEO of a real estate development firm). The Senate confirmed Jackson and 

Larson in April 1990. 

24 For example, in December 1989 there was some suggestion that the 

Oversight Board might be interested in setting RTC employment ceilings. When 

RTC Executive Director David Cooke, remarking that this seemed to be outside 

of the Oversight Board’s territory, asked the RTC Board if it wanted to provide 

guidance to the Oversight Board, the RTC Board’s members declined, with 

Seidman noting, “If this is oversight, they might as well handle everything” 

(RTC Board of Directors Meeting, December 12, 1989). 

25 RTC Board of Directors Meeting, January 9, 1990. 

26 RTC Board of Directors Meeting, October 24, 1989. 

27 Barbara A. Rehm, “21-Year Veteran of FDIC Climbs to Top RTC Post,”
 

American Banker (August 10, 1989).
 

28 Jim McTague, “RTC Told to Delay Major Deals; Key Policy Issues Must Be
 

Resolved First,” American Banker (August 14, 1989).
 

29 Barbara Rehm, “Helmsman Cooke Plots RTC Course,” American Banker
 

(August 14, 1989). Seidman later recalled that even small transactions
 

created problems. The RTC had decided that as a means to show the world
 

that it would hit the ground running, the agency would liquidate three small
 

S&Ls and pay off their depositors. In the absence of defined policies, the
 

Oversight Board initially chose not to make funds available. Seidman informed
 

Deputy Treasury Secretary John Robson that if asked to explain why the thrifts
 

had not been liquidated (he was scheduled to appear on the news), he would
 

state that lack of funds was responsible. The Oversight Board reversed its
 

decision and made the funds available (L. William Seidman, Full Faith and
 

Credit: The Great S&L Debacle and Other Washington Sagas [1993], 204).
 

FDIC BANKING REVIEW 43 2006, VOLUME 18, NO. 2 
The Resolution Trust Corporation and Congress, 1989–1993 

When Clarke asked in August 1989 about the 

relationship with the Oversight Board, Seidman 

stated that it was taking a lot of work and that 

We’ve time and time again gotten to the brink 

with them where they say they don’t have this or 

they need that in order to give us money. And I 

have instructed the staff at that point to tell them 

that we are closing shop and going home. And 

when they have money, we’ll go back in business. 

And so far they’ve given us the money. One of 

these times they probably won’t. 

Seidman did say that he and William Taylor, the 

Oversight Board’s acting vice president for finance 

and administration, were attempting to create 

practical solutions to their problems.30 Nevertheless, in the matter of funds disbursement, the 

Oversight Board wanted to keep the shortest possible rein on the RTC, a policy that Seidman criticized openly just weeks after the RTC began 

operations, complaining that John Robson, deputy 

treasury secretary and the acting president of the 

Oversight Board, essentially had veto power over 

RTC management decisions because of his control 

over funding. In turn, Treasury was reported to be 

angered by public discussion of disagreement, and 

one commentator noted that the Oversight Board 

felt exposed, since it had ultimate responsibility for 

handing money over to the RTC.31 

Although Nicholas Brady called the troubles mere 

“healthy friction” that would occur in any startup 

operation, others thought the system was too complex; in their eyes, the “zeal to have prudent supervision . . . meant that the buck stops everywhere.” 

Daniel Brumbaugh, who had been an economist at 

the Bank Board, said the structure led to “artificial, 

arbitrary outcomes.”32 Rep. Vento described the 

RTC and the Oversight Board as “operating for the 

past two months by the collective seat of their collective pants”—a management style that, he 

claimed, had not worked.33 Congressmen such as 

Vento and Annunzio criticized initial drafts of the 

Oversight Board’s strategic plan as vague.34 The 

General Accounting Office (GAO) also found the 

early version of the plan too amorphous.35 The 

unfavorable perceptions were reinforced by the 

inability of the RTC and Oversight Board to 

decide on the method for raising the RTC’s working capital (discussed in detail below).36 

Daniel Kearney’s appointment as Oversight Board 

president in October was meant to bring to the 

Oversight Board someone who had experience in 

both private sector real estate and government and 

who would be able to repair the frayed relationship 

between the RTC and Treasury.37 However, Kearney resigned after only four months, citing a misunderstanding on both his and the Treasury’s part 

about the scope of the powers vested in the position. This was generally taken to mean that Treasury had never given Kearney any real authority 

and that he found the situation unacceptable.38 

Seidman noted that Kearney was replaced on an 

interim basis by William Taylor, who was able to 

get much more done not only because he was an 

experienced government official but also because, 

after Kearney’s resignation, Treasury had to be far 

more accommodating to avoid the repercussions 

from a second departure.39 

30 RTC Board of Directors Meeting, August 15, 1989. 

31 Nathaniel C. Nash, “Federal Savings Industry Rescue Is Entangled in Agency 

Disputes,” New York Times (August 28, 1989). 

32 Paulette Thomas, “Thrift Bailout, Lacking a Chief and Floundering as 

Officials Feud, Slows and Grows More Costly,” Wall Street Journal (October 

11, 1989).
 

33 Jim McTague, “RTC Sales Unfair to Small Banks,” American Banker
 

(October 20, 1989).
 

34 Barbara A. Rehm, “Lawmakers Say Guidelines from RTC Oversight Board
 

Are Vague,” American Banker (November 7, 1989).
 

35 Gregory Wright, “RTC May Run Dry by 1991,” National Mortgage News
 

(November 13, 1989).
 

36 John L. Douglas, the FDIC’s outgoing general counsel, stated in December
 

that if the working capital debate was not resolved, it would put the RTC out
 

of business, noting that the bickering with Treasury had to stop: “The RTC is
 

a beggar at Treasury’s door constantly” (Barbara A. Rehm, “No Money, Too
 

Many Rules, and No Friends,” American Banker [December 11, 1989]).
 

37 Kearney was a principal at a Boston real estate advisory firm and had
 

previously held posts at the Department of Housing and Urban Development,
 

the Government National Mortgage Association, and the Office of
 

Management and Budget (OMB) as well as Salomon Brothers (Barbara A.
 

Rehm, “Top RTC Overseer Plays Conciliator for Rival Factions,” American
 

Banker [November 7, 1989]).
 

38 Barbara A. Rehm, “Confidence in RTC Seen Waning; Kearney Exit Spells
 

Deeper Trouble for S&L Agency,” American Banker (February 12, 1990); Brian
 

Collins, “News Analysis: RTC Resignation Shows Tensions,” National Mortgage
 

News (February 19, 1990); and “The Thrift Bomb,” Wall Street Journal
 

(February 13, 1990). Kearney’s difficulties can be illustrated by a discussion
 

at an RTC board meeting, where it was noted that Kearney had made clear to
 

the Oversight Board that the RTC needed more flexibility to make deals. The
 

RTC board believed that Kearney was supportive and understood the issues
 

but that, despite significant effort, he had been unable to make real progress.
 

During the discussion, it was mentioned that the Oversight Board’s lack of
 

action was not the real problem because funding was controlled by Treasury
 

and the OMB (RTC Board of Directors Meeting, January 12, 1990).
 

39 Seidman, Full Faith and Credit, 205–6.
 

2006, VOLUME 18, NO. 2 44 FDIC BANKING REVIEW 
 

The Resolution Trust Corporation and Congress, 1989–1993 

Toward the end of 1989, largely as a result of the 

bifurcated management structure, the RTC’s operations were described as paralyzed. Noting that 

only 37 thrifts had been resolved since the agency 

had opened for business and that only 3 small 

thrifts had been resolved in the previous 10 weeks, 

one observer blamed much of the agency’s inaction 

on the Oversight Board, which, “in its zeal to 

avoid even the appearance of impropriety in cutting deals, . . . has thrown out all the bargaining 

tools developed over the years [by the FDIC].” An 

attorney dealing with financial institutions predicted that it would take several months at least before 

the Oversight Board might liberalize the terms of 

deals, several more months before the terms under 

which assets could be sold would be determined, 

and then a couple of more months before the RTC 

would be able to react to those rules and put significant numbers of deals into the pipeline.40 

By January, public criticisms of the management 

structure became more and more numerous. 

Auburn University economist James Barth, who 

had been the chief economist at the OTS, said the 

S&L cleanup was quickly unraveling. Rep. Henry 

Gonzalez noted that key positions remained 

unfilled and important policies unannounced. 

Vento called for the Oversight Board to be abolished because it was too cumbersome. Another 

commentator called the structure “an absolute 

absurdity” and argued that split responsibility 

meant no responsibility.41 Inside the RTC, there 

was clearly a certain amount of frustration with the 

situation. Seidman remarked that he thought it 

was the RTC’s job to run the cleanup and the 

Oversight Board’s to finance it, and that the Board 

should tell the RTC what they wanted, and the 

RTC would do it. “We can’t both have the 

responsibility and not have the responsibility and 

so we’re sitting here thinking up ways to get 

around the fact that they don’t know how to provide financing.”42 

The split between the RTC and the Oversight 

Board was evident in congressional oversight hearings in January 1990. When Rep. Chalmers Wylie 

asked Seidman and RTC Executive Director 

Cooke if the Oversight Board was necessary, Seidman replied that when originally consulted about 

the structure, he had suggested either setting up a 

new and separate RTC with its own board answerable to the administration or allowing the FDIC 

to take over the cleanup, with the inclusion in 

FIRREA of whatever constraints were considered 

necessary. Seidman’s implication was that the 

present structure was lacking. Cooke answered: 

“What we need at the operational arm is a fully 

operational board. We need a board that is available, accessible, and that we can exchange views 

and get decisions made.” Seidman noted that people at the Oversight Board had tried hard to cooperate and that Kearney’s performance was 

excellent, but asked, “Where did the buck stop in 

this whole process? If you can tell me, then we 

will know how to get it done, but at the present 

time it is almost impossible for David [Cooke] to 

know where to go and how to get operational decisions.” After this exchange, Wylie noted that he 

had asked the question “somewhat facetiously, but 

apparently it was a better question than I first 

thought.”43 During the following week, Robson 

told the Senate Banking Committee that he knew 

of “no instance in which the working relationship 

between the Oversight Board and the RTC has 

thwarted progress toward the common goal of carrying out the mandates of FIRREA.”44 

Just two weeks later, Kearney resigned. According 

to Rep. Charles Schumer, his departure suggested 

that initial startup frictions had not diminished. 

According to Vento, his leaving confirmed Vento’s 

belief the Oversight Board should be abolished. 

Former FDIC Chairman Isaac argued that the policies set by the Oversight Board had made deals 

uneconomical for bankers and that much of the 

problem had to do with the multiplicity of man40 Steve Klinkerman, “RTC Hogtied by Its Overseers,” American Banker
 

(December 26, 1989).
 

41 For these three observations, see Glenn Brenner, “Pace Slows in Bailout of
 

Thrifts; Shortage of Funds Threatens Effort to Sell Failed S&Ls,” Washington
 

Post (January 8, 1990); see also Robert M. Garsson, “Vento Urges Abolition of
 

RTC Oversight Board,” American Banker (January 8, 1990).
 

42 RTC Board of Directors Meeting, January 9, 1990.
 

43 U.S. House Committee on Banking, Finance and Urban Affairs, Oversight
 

Hearings (January 23–25, 1990), 98–100.
 

44 U.S. Senate Committee on Banking, Housing, and Urban Affairs, Second
 

Oversight Hearing (January 31, 1990), 19.
 

FDIC BANKING REVIEW 45 2006, VOLUME 18, NO. 2 
 

The Resolution Trust Corporation and Congress, 1989–1993 

agement layers.45 Gonzalez added his voice to 

those calling for change, noting that disarray and 

indecision were now publicly evident.46 The Wall 

Street Journal ran an editorial suggesting that “at 

the end of the day, Treasury has to get out of the 

way and let someone make decisions.”47 David 

Cooke reiterated that he had had a good relationship with Kearney and that [he and Kearney] had 

worked with Oversight Board staff to produce recommendations, “but where it goes from there is a 

mystery.”48 

Cumulatively the early record eventually resulted 

in proposed legislation designed to change the 

management structure put in place by FIRREA. In 

the immediate aftermath of Kearney’s departure, 

two bills were introduced, one in the Senate and 

one in the House. Sen. Robert Kerrey, who had 

attempted to change the makeup of the Oversight 

Board during the FIRREA debate, had reiterated 

his concerns in October. He maintained that the 

Oversight Board’s appointed officials were too busy 

with their governmental duties elsewhere to properly oversee the RTC.49 His solution to the management problem was to create a new single board 

of governors to manage the RTC. It would replace 

both the Oversight Board and the RTC Board of 

Directors and would have nine members, five of 

whom would be independent members nominated 

by the president and confirmed by the Senate; the 

others would be members of the current Oversight 

Board and the Chairman of the FDIC. Although 

in March Kerrey’s bill was also introduced in the 

House (by Rep. Peter Hoagland), nothing came of 

it.50 Vento, head of the House RTC task force, 

also introduced a bill to alter the management 

structure. His bill would abolish the Oversight 

Board and transfer its powers to the FDIC Board of 

Directors.51 This bill, too, failed to get anywhere, 

but clearly the RTC’s management structure was 

on its way back to the drawing board.52 

One reason Congress did not address the issue at 

this time was that just before Kearney’s resignation, 

Senate Banking Committee Chairman Donald 

Riegle said he thought FIRREA needed to be 

given time to work and he had “no intention of 

opening it back up.”53 Even after Kearney left, it 

was reported that Congress was unlikely to take up 

any structural change, and Seidman discounted the 

possibility of such change, noting that Bush would 

veto any bill incorporating a change of that 

nature.54 In addition, by late March, Treasury officials were reported as having said that relations 

between the RTC and the Oversight Board had 

improved markedly. They ascribed the improvement to Seidman’s recognition that criticism of the 

Oversight Board “eventually sticks to him as 

well.”55 As noted above, the improvement was 

certainly partly the result of William Taylor’s having become acting Oversight Board president in 

place of Kearney.56 The RTC, Treasury and the 

Oversight Board were likely all chastened by the 

consistent criticism of them in the public debate. 

The structure of RTC management and its perceived effect on RTC performance would, however, return to the congressional agenda repeatedly as 

Congress debated RTC operations during the next 

several years. 

45 Nathaniel C. Nash, “Resignation at Savings Agency,” New York Times 

(February 10, 1990).
 

46 Barbara A. Rehm, “Confidence in RTC Seen Waning; Kearney Exit Spells
 

Deeper Trouble for S&L Agency, American Banker (February 12, 1990).
 

47 “The Thrift Bomb,” Wall Street Journal (February 13, 1990).
 

48 Brian Collins, “RTC Resignation Shows Tensions,” National Mortgage News
 

(February 19, 1990).
 

49 U.S. Senate Committee on Banking, Housing, and Urban Affairs, Oversight
 

Hearing (October 4, 1989), 66–67.
 

50 S. 2155 and H.R. 4386, the Resolution Trust Corporation Reorganization
 

Act.
 

51 H.R. 4127, introduced on February 27, 1990.
 

52 During 1990, two other bills also sought to change the RTC’s management
 

structure. One, H.R. 4851, the Financial Institutions Oversight Reform Act
 

introduced by Rep. William Gradison in May, was a sweeping bill establishing
 

Treasury control over financial institutions. It would have abolished not only
 

the RTC but also several other entities, including the Office of Thrift
 

Supervision (OTS). Given the extreme nature of this bill, it is unsurprising
 

that it received little attention. Another bill, S. 3112, introduced by Senator
 

Tim Wirth in September, would have abolished the Oversight Board and
 

created a new Board of Directors for the RTC, consisting of the FDIC’s board
 

and two independent members to be nominated by the president. These bills
 

show that in some quarters the notion of changing the management structure
 

persisted throughout 1990.
 

53 Robert M. Garsson, “Riegle Opposes Efforts to Amend S&L Bailout,”
 

American Banker (February 6, 1990). 

54 Brian Collins, “RTC Resignation Shows Tensions,” National Mortgage News
 

(February 19, 1990).
 

55 Robert M. Garsson, “Seidman Opens 2nd Office at RTC Headquarters,”
 

American Banker (March 26, 1990).
 

56 Seidman predicted that Taylor would be able to be more flexible than his
 

predecessor (RTC Board of Directors Meeting, February 13, 1990). Taylor
 

served as acting president until June, when Peter Monroe, a former deputy
 

assistant secretary at HUD, took the position (Linda Corman, “RTC’s New
 

Oversight Chief Has Learned to Get Along,” American Banker [June 4, 1990]).
 

2006, VOLUME 18, NO. 2 46 FDIC BANKING REVIEW 
The Resolution Trust Corporation and Congress, 1989–1993 

The Working Capital Problem 

The $50 billion that FIRREA provided to the 

RTC were “loss funds,” funds to make insured 

depositors whole for losses suffered by insolvent 

institutions. FIRREA was silent about working 

capital, but the need for it was obvious: the RTC 

would incur carrying costs associated with the 

assets of failed institutions until those assets could 

be sold. The money borrowed for working capital 

would eventually be repaid from those asset sales. 

The requirement for working capital had been 

communicated to Congress before FIRREA 

passed.57 Just several weeks after the RTC began 

its work, David Cooke noted that the Oversight 

Board was investigating setting up a financing 

vehicle.58 In October, Seidman told the Senate 

Banking Committee that the RTC would require 

working capital so that it could continue resolving 

institutions without resorting to “uneconomic asset 

disposition policies.” He emphasized that the 

working capital borrowings would in no way add to 

the $50 billion provided for loss funds and that any 

working capital program would still fall under the 

obligation limit imposed by FIRREA (discussed 

below) and would therefore be determined by the 

underlying value of the RTC’s assets.59 The subject of working capital was discussed again before 

the congressional RTC task force in October and 

November, when Oversight Board members, RTC 

officers, and the GAO all emphasized the need for 

it.60 

Although the need for working capital was 

straightforward, finding the means to provide it 

became highly politicized. As a result, six months 

would pass before the issues surrounding this funding would be resolved. To understand the debate, 

one must place it within the larger picture of the 

budget. FIRREA’s provision of the RTC’s loss 

funds had been marked by a partisan struggle over 

their budgetary treatment. Democrats had argued 

for all loss funds to be from Treasury appropriations. The administration preferred an “off-budget” financing method. Spending funded by 

appropriations would increase the reported budget 

deficit and make it more difficult to meet the 

Gramm-Rudman-Hollings (GRH) deficit reduction law’s targets; spending funded “off-budget” 

would not.61 In the end, FIRREA represented a 

compromise—with $18.8 billion in on-budget 

Treasury appropriations and $30 billion from bonds 

issued by the off-budget Resolution Funding Corporation (RefCorp). Another $1.2 billion was funneled from the Federal Home Loan Bank System 

through RefCorp to the RTC. Some who were 

involved in the process believed the Democrats 

saw RTC working capital as a way to try to force 

the president to abandon his promise not to raise 

taxes,62 although the debate was also about the 

transparency of the budget. But the delay in finding a solution could also be ascribed to the Bush 

administration’s anxiety at being seen as directing 

increased monies to the RTC and to its desire to at 

least moot the idea of using an off-budget vehicle 

to fund working capital in order to avoid further 

constraints on the administration’s spending choices during this period of high deficits. In the end, it 

turned out that neither Congress nor the administration preferred having the RTC as a constant 

companion to budget negotiations. 

The Debate about Method 

The administration was never publicly forthcoming about the methods it was considering using, 

but it was rumored that one possible way to provide working capital was to create a “Resolution 

Bank.” Some Democrats in Congress thought the 

administration wanted to create another RefCorp 

57 See for example, letter from L. William Seidman to Sen. Donald W. Riegle,
 

Jr., June 26, 1989, reprinted in U.S. House Committee on Banking, Finance
 

and Urban Affairs, Oversight Hearings (Jan. 23–25, 1990), 560ff. Seidman
 

then noted that “RTC likely will need considerably more than $50 billion to
 

provide working capital to effect resolutions. . . . RTC must have the ability
 

to raise cash or provide cash-equivalent obligations.”
 

58 Brian Collins, “RTC Chafes under Tight Grip,” National Mortgage News
 

(August 28, 1989).
 

59 U.S. Senate Committee on Banking, Housing, and Urban Affairs, Oversight
 

Hearing (October 4, 1989), 118–19.
 

60 U.S. House Committee on Banking, Finance and Urban Affairs,
 

Subcommittee on Financial Institutions Supervision, Regulation and Insurance,
 

Resolution Trust Corporation Task Force, Status and Activities (October 4 and
 

19, November 6 and 13, 1989), passim.
 

61 GRH created “maximum deficit amounts.” The law mandated that if these
 

were exceeded, the president would be required to issue a sequester order to
 

reduce all nonexempt spending by the same percentage.
 

62 At least this was the case according to OTS Director M. Danny Wall (RTC
 

Board of Directors Meeting, January 9, 1990). 


FDIC BANKING REVIEW 47 2006, VOLUME 18, NO. 2 
The Resolution Trust Corporation and Congress, 1989–1993 

and this belief led to the introduction of the first 

post-FIRREA RTC-related piece of legislation: the 

Federal Agency Debt Management Act (referred 

to below as the Stark bill).63 The bill—which was 

aimed specifically at the RTC even though the 

agency was never mentioned—would have prohibited federal agencies established after December 

31, 1988, from “incurring any financial obligation 

other than authorized borrowings from the Treasury.” The bill was intended to underscore congressional Democrats’ opposition to another 

off-budget funding entity. Treasury Assistant Secretary David Mullins told Congress that although 

FIRREA had no explicit plan for working capital 

borrowing, the question had been discussed with 

Congress during the debate over that law. 

(FIRREA in fact authorized such borrowing— 

concern about it had engendered Rep. Gonzalez’s 

insistence on an obligations limit—and the 

method of borrowing had been left open to provide the RTC with maximum flexibility.)64 

Mullins argued that the Stark bill was unworkable 

and would interfere with routine RTC transactions 

in offering guarantees; in addition, since FIRREA 

provided only for $5 billion in RTC borrowing 

from the Treasury, the bill would apparently limit 

working capital to that very insufficient amount. 

Mullins also noted that the administration 

believed the budgetary treatment of working capital should wait until some plan was chosen but 

that nevertheless it would be improper to “distort” 

the budget by “ballooning budget expenditures in 

early years with amounts that will be fully repaid 

with budget receipts in later years.” Moreover, 

recording RTC working capital spending on-budget could have perverse effects. Working capital 

borrowing (after fiscal year 1990)65 would count as 

budget outlays and potentially force budget cuts 

elsewhere, while the proceeds of asset sales in the 

later years would reduce net budget outlays, possibly allowing higher levels of government spending 

in those years than would otherwise be the case. 

Although there would be no net difference in 

spending over time, placing RTC working capital 

on-budget could arbitrarily affect the timing of 

government spending. Lastly, he noted that scored 

on-budget, RTC operations might become the 

largest single discretionary determinant of budget 

results, making the RTC even more political. 

Congress, Mullins said, should “think long and 

hard before allowing the budget process to drive 

the case resolution and asset disposition process.” 

The administration obviously opposed the bill. 

RTC Chairman Seidman said the agency would 

require at least $50 billion in working capital, noting that working capital would smooth “out the 

timing difference between the RTC’s cash outlays 

and its cash inflows” and that it was also needed to 

replace high-cost funds as a way to lower resolution costs. The alternative was to borrow using 

insured deposits at a much higher cost.66 Other 

alternatives to raising working capital, such as 

using whole-thrift transactions or slowing the pace 

of resolutions to correspond to asset sales, would 

also prove costly. He reiterated that because the 

bill prohibited any financing other than through 

the Treasury but provided no additional Treasury 

financing beyond FIRREA’s $5 billion, in practical 

terms the bill would simply “prevent the RTC from 

raising adequate working capital.”67 

63 H.R. 3469 was introduced on October 13, 1989, by Rep. Fortney Stark;
 

several important House members, including Dan Rostenkowski, were cosponsors.
 

64 U.S. House Committee on Ways and Means, Subcommittee on Oversight,
 

Role of Federal Borrowing and Loan Guarantees (October 31, 1989), 36ff. For
 

the FIRREA obligations limit, see Davison (2005), 29, and the discussion in
 

the present article.
 

65 Because the GRH law applied only to prospective fiscal years, working
 

capital outlays financed by borrowing in the current fiscal year would not
 

trigger the need for spending cuts.
 

66 Thrifts in conservatorship were still operating institutions (run by the RTC)
 

and needed to fund their assets. The greater the amount of funding provided
 

to the institution through loans from the RTC, the less funding the thrift
 

would have to seek in the deposit markets at higher cost. High-cost funds
 

replacement therefore lowered the cost to the taxpayer. For a description of
 

the conservatorship process, see FDIC, Managing the Crisis, 117–18.
 

67 He was also concerned that the bill might be interpreted as applying to
 

RefCorp, an interpretation that would put it in conflict with FIRREA, and that
 

it might prohibit the RTC from providing the assurances and indemnities
 

against lawsuits that are routinely provided to acquirers of institutions or
 

assets. It might also be interpreted as banning putbacks of assets, thereby
 

increasing the need for working capital, and might make it very costly for the
 

RTC to securitize assets. All in all, Seidman felt the bill could put the RTC
 

out of business (U.S. House Committee on Ways and Means, Subcommittee on
 

Oversight, Role of Federal Borrowing and Loan Guarantees [October 31, 1989],
 

51ff.).
 

2006, VOLUME 18, NO. 2 48 FDIC BANKING REVIEW 
 

The Resolution Trust Corporation and Congress, 1989–1993 

Whereas the RTC wanted working capital simply 

so the agency could do its job, politics played a significant role in the debate between the administration and congressional Democrats. As Rep. Stark 

told Seidman, deposits in S&Ls had to be honored, 

and the RTC would end up with large amounts of 

assets that no one wanted to see dumped; working 

capital was therefore required. But, he noted, “We 

have some political differences that you’re not 

privy to or involved in.”68 In mid-November congressional Democrats and the administration 

agreed to postpone their disagreements over the 

issue of working capital: the Oversight Board and 

the RTC agreed not to seek to raise working capital during the congressional recess and to create a 

plan in consultation with Congress in 1990; and 

for its part, the House Ways and Means Committee agreed not to send the Stark bill to the House 

floor.69 

This political compromise did not, however, 

relieve the RTC’s very real operational concerns 

about a lack of working capital. By late November, the agency was adhering to its schedule for resolutions but was expected to have spent all the 

funds allocated to it for the fourth quarter and also 

for the early part of the first quarter of 1990. 

There was some concern that unless an agreement 

over working capital was arrived at quickly, the 

pace of resolutions would be affected.70 By midDecember, RTC management became even more 

concerned, for they had seen indications that the 

RTC’s lack of working capital and liquidity problems were now publicly known and could have 

adverse effects, notably in the agency’s dealings 

with deposit brokers who might demand higher 

rates, particularly because they knew the RTC 

could abrogate contracts.71 Seidman advised that 

the RTC should slow down its work and should 

not count on getting any working capital until the 

end of the first quarter. His prediction proved reasonably accurate.72 

By early January 1990, the administration was narrowing down the potential mechanisms for raising 

working capital.73 The creation of another offbudget entity had been rejected, and administration officials were suggesting a combination of 

Federal Financing Bank (FFB) borrowing and the 

sale of short-term notes backed by S&L assets.74 

Congressional Democrats supported only FFB borrowing, and without a quick decision from the 

administration, they would resume their push for 

the Stark bill. In mid-January, despite Seidman’s 

belief that the RTC had to slow down, the Treasury contended that the RTC had sufficient funds 

to continue operations through the second quarter, 

and the House Banking Committee reportedly 

remained skeptical that the RTC needed more 

funds; one committee staff member suggested that 

the agency simply use the $50 billion in appropriated loss funds, noting “cash is cash.”75 At this 

point, however, the RefCorp had sold only $4.5 

billion in bonds in October, and though it was to 

sell another $5 billion on January 17, it would 

need four additional offerings over the following 

year to raise all the funds provided for in 

FIRREA.76 (See Figure 2.) As William Roelle 

(Director of the RTC’s Resolutions and Operations 

68 Ibid., 92. 

69 Robert M. Garsson, “RTC Funding Fight Put on Hold until Next Year,”
 

American Banker (November 15, 1989).
 

70 RTC Board of Directors Meeting, November 29, 1989.
 

71 Several weeks earlier, when the agency had been unable to get a clear
 

answer on how it could draw in a timely fashion on the $5 billion line of
 

credit established by FIRREA, it had been forced to hold $1 billion in reserve
 that might have gone toward replacing high-cost funds (RTC Board of Directors
 

Meeting, November 29, 1989).
 

72 Ibid., December 19, 1989.
 

73 Jerry Knight, “S&L Board Unveils Its Rescue Plan; Needed Funding Remains
 

Uncertain,” Washington Post (January 4, 1990). In fact, in late November, in
 

discussions with RTC management, Kearney said the Oversight Board was
 

ready to submit its working capital plans to the administration for discussion
 

and was leaning toward direct borrowing from the Federal Financing Bank
 

(FFB). (The FFB was created by Congress in 1973 to centralize borrowing by
 

federal agencies and reduce the cost of such borrowing.) The RTC was also
 

told that the OMB had “somehow decided that [using the FFB] may be off
 

budget.” Cooke told Kearney that the budget status was immaterial to the
 

RTC; Kearney replied that it was immaterial to him as well (RTC Board of
 

Directors Meeting, November 29, 1989). As indicated above, however, the
 

budget-scoring issue was very important to both the administration and
 

Congress.
 

74 Paulette Thomas, “S&L Bailout Aides Scrap Plan to Create Off-Budget
 

Agency to Raise Financing,” Wall Street Journal (January 9, 1990).
 

75 Barbara A. Rehm, “RTC Plans to Dispose of 50 Thrifts in 1st Period,”
 

American Banker (January 16, 1990).
 

76 The RefCorp was a mixed-ownership government corporation established by
 

FIRREA to provide the RTC with $30 billion of its initial $50 billion in
 

funding (see Davison [2005], 35–37. RefCorp bond offerings were made in
 

October 1989 ($4.5 billion), January 1990 ($5 billion), April 1990 ($3.5
 

billion), July 1990 ($5 billion), October 1990 ($5 billion), and January 1991
 

($6.9 billion). See Oversight Board press releases dated October 18, 1989;
 

January 17, 1990; April 4, 1990; July 3, 1990; October 2, 1990; and January
 

2, 1991.
 

FDIC BANKING REVIEW 49 2006, VOLUME 18, NO. 2 
The Resolution Trust Corporation and Congress, 1989–1993 

Division) noted, “Cash is cash [only] when you get 

it.”77 Shortly thereafter, the RTC indicated that 

in order to fund RTC operations, it might be 

forced to demand early repayment of the $11.3 billion lent to 169 thrifts. The demand could force 

the thrifts to depend once again on high-cost 

funds, driving up deposit interest rates across the 

United States.78 Such an eventuality belied the 

Treasury claim that the RTC had enough cash to 

last into the second quarter, and indeed, not long 

afterward, John Robson informed Congress that 

the RTC would need an infusion of working capital funds during the first quarter of 1990.79 

Despite the political jostling, it was most unlikely 

that the administration could persuade congressional Democrats to approve anything other than 

FFB borrowing. It was clear that working capital 

was necessary and would be provided; the politics 

surrounding the budgetary treatment of working 

capital were just as clear; and the administration 

undoubtedly preferred a method that would not 

increase the deficit.80 In mid-February, the Justice 

Department ruled that the RTC had the authority 

to raise funds through the FFB, at last clearing the 

way for the RTC to be provided with working capital.81 The announcement was immediately made 

that the RTC would raise $11 billion in the first 

quarter, with $8 billion going for carrying costs of 

receivership assets and $3 billion for the replacement of high-cost funds backing conservatorships.82 

Figure 2 

Authorized RTC Loss Funding and Outstanding
 

RTC Working Capital Borrowings, 1989–1995
 

$ Billions Note: The decrease in available loss funds in 1992 120 

100 

80 

60 

40 

20 

Working Capital Borrowings 

Note: Although $50 billion in loss funding was 

authorized by Congress in 1989, the portion 

funded through RefCorp bonds was raised 

gradually from October 1989 through January 1991. 

reflects the expiration (on April 1, 1992) of authority 

to use funds provided in the RTC Refinancing, 

Restructuring and Improvement Act of 1991. 

Loss Funds 

4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 

1989 1990 1991 1992 1993 1994 1995 

The RTC had been provided with working capital, 

but what the additional borrowing would mean for 

the budget was less clear. Since the fiscal-year 

1990 budget was already in place, any 1990 borrowings might increase the deficit but would not 

require any action under Gramm-Rudman. In 

1991, however, any substantial increase in the 

deficit resulting from RTC borrowing might make 

necessary significant offsetting budget cuts (something neither party would find palatable), barring a 

tax increase that Bush had already forsworn. The 

solution was to exclude RTC working capital from 

the GRH budget targets, a goal accomplished by a 

provision approved by the Senate Appropriations 

Committee in April. Reportedly, the administration, the Congressional Budget Office (CBO), and 

the Senate leadership supported the legislative 

change.83 In the end, the Budget Enforcement 

Act of 1990 effected the exclusion, whose relevant 

provision also had the salutary effect of excluding 

77 Barbara A. Rehm, “RTC Plans to Dispose of 50 Thrifts in 1st Period,” 

American Banker (January 16, 1990).
 

78 Steve Klinkerman, “RTC Efforts to Get Cash Could Raise Thrift Rates,”
 

American Banker (January 19, 1990).
 

79 U.S. House Committee on Banking, Finance and Urban Affairs, Oversight
 

Hearings (January 23–25, 1990), 27–28.
 

80 Barbara A. Rehm, “Administration Plans to Find Capital for RTC,” American
 

Banker (February 1, 1990). 


81 Robert M. Garsson, “Justice Says RTC Can Use Federal Bank for Capital,”
 

American Banker (February 16, 1990).
 

82 “S&L Rescuers Are Cleared to Use Short-Term Funds,” Wall Street Journal
 

(February 16, 1990). The Treasury announced that it would increase the
 

amounts of its weekly auctions of short-term bills and 52-week bills to raise
 

the needed funds (“U.S. to Boost Level of Borrowing to Fund S&L Industry
 

Bailout,” Wall Street Journal [February 21, 1990]). Much of these funds was
 

not spent during the first quarter because thrift resolutions slowed; however,
 

as the RTC contemplated a major drive to resolve 141 institutions in the
 

second quarter, it was authorized to borrow up to $45.3 billion (“Thrift
 

Agency Is Cleared to Borrow $45.3 Billion,” Wall Street Journal [April 12,
 

1990]).
 

83 David Rogers, “Bill Seeks to End Count of RTC Fund under Deficit Law,”
 

Wall Street Journal (April 26, 1990). Treasury Secretary Brady, in response to
 

a question in May, noted, “You don’t want to complicate an already
 

complicated set of budget negotiations . . . by swinging it back and forth
 

with respect to working capital. It could be $50 billion worse this year and
 

$30 billion better the next year, and it would raise havoc with the Gramm-


Rudman target” (U.S. Senate Committee on Banking, Housing, and Urban
 

Affairs, Hearing on the Semiannual Report [May 23, 1990], 67). This was
 

also the position of the chairman of the Federal Reserve Board, Alan
 

Greenspan, who in January had said that the basic purpose of GrammRudman-Hollings was to raise total domestic savings and that since RTC
 

working capital was a transfer of assets, it would have no effect on domestic
 

savings and should be excluded from the GRH calculations. He was also
 

concerned about the false effects that receipts from asset sales might have on
 

the budget in later years. See U.S. Senate Committee on Banking, Housing,
 

and Urban Affairs, Second Oversight Hearing (January 31, 1990), 76–77.
 

2006, VOLUME 18, NO. 2 50 FDIC BANKING REVIEW 

0 
The Resolution Trust Corporation and Congress, 1989–1993 

any further legislative appropriations for RTC losses from the budget deficit reduction process.84 

The $18.8 Billion Loophole 

The working capital saga was not quite over, however. Although the mechanism through which the 

RTC would borrow was agreed to, the possibility 

still existed that the agency would be unable to 

borrow enough working capital to fund its operations. In June 1990, Treasury Secretary Brady— 

even as he asked for appropriations for loss funds 

beyond the $50 billion already provided— 

informed Congress that before the RTC spent the 

$50 billion for losses, it was likely to run up against 

the obligation limit set by FIRREA at the insistence of Rep. Gonzalez. The obligation limit (also 

known as the note cap) was intended to restrict 

total RTC obligations to the sum of its cash, 

unused loss funds, and 85 percent of the fair market value of assets it acquired.85 This meant essentially that the RTC had to hold unused loss funds 

in reserve in an amount equal to 15 percent of the 

fair market value of its assets.86 These funds would 

serve as a capital cushion for repayment of debt 

obligations in the event that RTC’s estimates of 

fair market values proved to be too optimistic. The 

Oversight Board characterized the situation as 

requiring immediate attention, and the RTC held 

out the possibility of needing to “dramatically step 

up asset sales to fund resolutions.” Others argued 

that the administration was simply applying pressure to have RTC borrowing excluded from the 

budget (which, as noted, did occur), and a Senate 

Banking Committee staffer said that although the 

RTC would run into the obligations limit before 

the end of the year, the danger was not imminent.87 This prediction was fairly accurate, but the 

fear that the RTC would have to radically slow the 

pace of its resolutions stirred action. 

The solution to the difficulty lay in an oversight: 

FIRREA’s note cap formula implicitly calculated 

unused loss funds as the excess of the $50 billion 

authorized by FIRREA over RefCorp funds 

received to date. However, RefCorp funding could 

only account for up to $31.2 of the $50 billion; the 

note cap (erroneously) omitted a reference to the 

$18.8 billion in Treasury funding that had also 

been provided in FIRREA. The RTC, to reassure 

Congress that it would not take advantage of the 

error, had been including the Treasury funding in 

its borrowing limit calculations regardless (i.e., as if 

it were no different than RefCorp funds). Until 

mid-1990, this compensatory calculation was of little consequence, but Treasury projected that if the 

RTC continued the calculation in this manner, the 

obligations limitation would become a real constraint by the fourth quarter.88 Undersecretary 

Robert Glauber told the House Banking Committee that a literal reading of FIRREA would deduct 

only RefCorp contributions received from the $50 

billion in FIRREA-authorized funds to determine 

the amount of unused loss funds available to back 

new obligations. This would permit the remaining 

$18.8 billion to offset the note cap’s required 

reserve of loss funds (15 percent of the fair market 

value of assets) originally intended to ensure that 

RTC could repay its working capital borrowing. In 

effect, the RTC would be able to borrow for working capital up to 100 percent of the fair market 

value of assets acquired.89 He added that “in the 

absence of action by Congress, we would be faced 

with the choice between using the $18.8 billion to 

raise working capital and shutting down the resolution activity of the RTC,” but he said that the 

RTC would not take the former course without 

congressional approval.90 House members at the 

hearing, confronted by the simultaneous request 

for significant additional loss funds, paid scant 

attention to the working capital issue, but a deci84 Budget Enforcement Act of 1990, Sec. 13101 (specifically, see sec. 252[b]), 

104 STAT 1388-581. 

85 U.S. House Committee on Banking, Finance and Urban Affairs, Semiannual 

Report and Appearance by the Oversight Board (June 14, 1990), 15. This 

description is a simpler way of presenting the limitation. More formally, the 

sum of contributions received from RefCorp plus outstanding obligations could 

not exceed the RTC’s available cash plus 85 percent of the fair market value 

of its other assets by more than $50 billion. Reacting to the 1988 FSLIC 

deals, Rep. Henry Gonzalez had insisted on including a provision that would 

limit the RTC’s outstanding obligations. 

86 U.S. House Committee on Ways and Means, Additional Financing Costs 

(September 19, 1990), 35. 

87 Debra Cope and Robert M. Garsson, “Brady Expected to Warn Congress RTC 

May Run Out of Cash by Fall,” American Banker (June 13, 1990). 

88 U.S. House Committee on Banking, Finance and Urban Affairs, Funding the 

Resolution Trust Corporation (July 30, 1990), 15, 139. 

89 As $18.8 billion is equivalent to 15% of $125.33 billion, the latter figure 

was the effective limit on RTC working capital borrowing. Outstanding FFB 

working capital borrowings peaked in 1991 at approximately $63 billion. 

90 Ibid., 15–16. 

FDIC BANKING REVIEW 51 2006, VOLUME 18, NO. 2 
The Resolution Trust Corporation and Congress, 1989–1993 

sion to acquiesce in the literal interpretation 

would allow Congress to delay a highly contentious vote on new loss funding until after the 

November elections.91 

Nevertheless, it took some time to get there. In 

late August Nicholas Brady noted in a letter to 

Rep. Dan Rostenkowski that although the administration had no specific proposal for adjusting the 

note cap, any funding legislation had to deal with 

the obligations limitation. A month later, Seidman again warned that without action, RTC resolutions would have to be tied to asset sales and 

would slow to “only a handful of institutions per 

quarter.” Although the RTC had not yet run up 

against the limit, Seidman reiterated that it would 

soon become a constraint. He suggested that 

rather than omit the $18.8 billion in Treasury 

funding from the calculation, FIRREA be amended 

to allow the RTC to borrow 100 percent of the fair 

market value of its assets, noting that “since the 

ultimate costs will be the Government’s in any 

event, it does not seem that the Government is 

taking any real risk [if such a change is made].”92 

Once again, however, Congress was concentrating 

much more on the increase in loss funds than on 

operating capital. The assumption was that somewhere in the new funding legislation Congress 

would address the working capital issue; however, 

as discussed below, Congress adjourned without 

agreeing to any new RTC funding. Just before the 

adjournment, the House Banking Committee on a 

voice vote approved allowing the RTC to use the 

$18.8 billion drafting error and the Senate followed suit.93 

On October 30, the RTC wrote to the Oversight 

Board asking that it be allowed to take advantage 

of the $18.8 billion drafting error and stating that 

otherwise, operations would come to a halt before 

the end of the year.94 Two days later the Oversight Board agreed, providing the RTC with sufficient working capital and access to loss funds to 

continue resolving institutions until Congress 

could return to the issue in the new session.95 

Gonzalez and Riegle had both written to the Oversight Board encouraging this action.96 This interpretation of FIRREA could conceivably have been 

challenged in the courts, but Gonzalez noted that 

with Congress having failed to pass any new funding for the RTC, he believed no one in Congress 

would object to the decision.97 Once the decision 

was made, David Cooke told the RTC Board that 

the agency could move quickly to market the larger institutions it had planned to resolve during the 

fourth quarter, and that it could now continue 

through February 1991.98 

Table 1 shows what the limitations on outstanding 

obligations would have been under the note cap 

formula (see note 85) from March 31, 1990, to 

March 31, 1991. As the table shows, without 

approval to take advantage of the loophole, the 

RTC would have exceeded the obligations limitation before year-end. With the changed calculation, however, the agency easily complied with the 

limitation.99 In hindsight, the RTC’s position 

would have been easier if FIRREA had dealt more 

directly with working capital—if doing so had 

even been possible. Congressional attitudes in 

1990 illustrate the difficulties that would have 

91 “Treasury Scrambling for Funds for RTC,” National Mortgage News (August
 

6, 1990).
 

92 U.S. House Committee on Ways and Means, Additional Financing Costs
 

(September 19, 1990) 5, 34. See also Paulette Thomas, “Seidman Totals
 

Growing Costs of S&L Rescue,” Wall Street Journal (September 20, 1990).
 

93 Barbara A. Rehm, “House Bank Panel Votes Added Funds to RTC,” American
 

Banker (October 24, 1990).
 

94 RTC Board of Directors Meeting, October 30, 1990.
 

95 Stephen Labaton, “Loophole to Be Used to Keep Bailout Afloat,” New York
 

Times (November 2, 1990).
 

96 U.S. General Accounting Office, Obligations Limitation: Resolution Trust
 

Corporation’s Compliance as of September 30, 1990 (1991), 4–5.
 

97 “RTC to Borrow Working Capital; Regulators Avoid Funding Halt,” BNA’s
 

Banking Report 55 (November 5, 1990), 747-48.
 

98 RTC Board of Directors Meeting, November 2, 1990.
 

99 The GAO noted that the exclusion of Treasury contributions “effectively
 

eliminated the 15 percent cash reserve feature and resulted in a potentially
 

misleading assessment” of the RTC’s ability “to fund any future losses
 

resulting from assets sales at less than their recorded value,” and suggested
 

that FIRREA be amended to fix this problem (U.S. GAO, Obligations Limitation
 

as of December 31, 1990 (1991), 6–7. The GAO would later note that the
 

Resolution Trust Corporation Funding Act of 1991, which provided an
 

additional $30 billion in loss funds (see the relevant section of this article for
 

a discussion of the 1991 law), made the FIRREA obligations limitation formula
 

even more misleading because the 1991 law did not amend the formula; thus,
 

the additional funding was excluded from the calculation. In fact, Congress
 

never changed the note cap formula, even as further laws (not only in 1991
 

but also in 1993) provided additional loss funds, and the obligations limitation
 

never again became a constraint on RTC operations. Indeed, the GAO ceased
 

publishing a calculation of the obligations limitation. (However, both the
 

Senate and the House had included a revised obligations limitation formula in
 

their abortive attempts to pass new funding legislation at the end of 1990
 

For the 1990 bills, see S. 3222 and H.R. 5891, 101st Cong., 2nd sess.)
 

2006, VOLUME 18, NO. 2 52 FDIC BANKING REVIEW 
The Resolution Trust Corporation and Congress, 1989–1993 

attended adding anything to FIRREA that might 

have been portrayed as additional funding. Moreover, since the number of institutions and the volume of assets the RTC was dealing with were 

moving targets, any working capital provisions in 

FIRREA would likely have proved inadequate. 

And the Bush administration might have believed 

that it could borrow working capital quietly offbudget after the fact, although given the scrutiny 

attached to the RTC, any such attempt would likely have failed. 

The struggle over working capital demonstrates 

how politicized RTC spending was and how 

enmeshed the agency was in budget brinksmanship 

at a time when the federal budget was in serious 

deficit. Irrespective of this, however, the number 

of insolvent institutions and the associated costs of 

resolving them kept rising. Had FIRREA not 

inadvertently included the $18.8 billion loophole, 

the RTC’s operations might have been seriously 

impaired by the end of 1990, and Congress would 

undoubtedly—although perhaps grudgingly—have 

been forced into a swift about-face. However, as 

discussed below, the politics of RTC funding often 

led to impasse. 

Table 1 

The 1990 Legislative Stalemate 

As noted, FIRREA’s $50 billion in loss funds was 

almost immediately recognized as insufficient. In 

January 1990, Seidman told Congress that 

although the $50 billion would cover insolvencies 

into 1991, it was obvious that more would be 

needed, perhaps another $24 billion. The reaction 

of Democratic Rep. Frank Annunzio was not 

encouraging: there was, he said, “No way you are 

getting money from the Congress.”100 Republican 

Rep. James Leach noted, “Congress would rather 

not deal with the thrift issue ever again . . . but it 

probably has no choice.”101 Both of Leach’s points 

would turn out to be true. The RTC did not get 

its money from Congress in that session, and Congress did have to deal with the issue again in the 

following session. 

In March, the House Banking Committee RTC 

task force predicted that the RTC would require 

100 Paulette Thomas, “Latest Estimates Show Thrift Bailout May Cost $24 

Billion over Allocation,” Wall Street Journal (January 25, 1990). 

101 Robert M. Garsson, “2nd Thrift Bill Takes Shape, but Congress Is 

Reluctant,” American Banker (January 22, 1990). 

Limitation on Outstanding Obligations 

3/31/1990–3/31/1991 ($ Millions) 

A B C D (A+B–C–D) 

Cash Adjusted 

Contributions Outstanding and 85% FMV Obligation Maximum 

Received Obligations Equivalents Assets Level Level 

3/31/1990a 29,526 2,760 3,181 13,728 15,377 50,000 

6/30/1990a 33,021 30,162 4,043 29,593 29,547 50,000 

9/30/1990 19,221 48,864 5,113 40,985 21,987 50,000 

9/30/1990a 38,021 48,864 5,113 40,985 40,787 50,000 

12/31/1990 24,248 54,777 5,177 40,930 32,918 50,000 

12/31/1990a 43,048 54,777 5,177 40,930 51,718 50,000 

3/31/1991 31,286 58,532 5,060 43,713 41,045 50,000 

Note: For an explanation of the formula used to calculate the obligations limit, see note 85. 

Sources: U.S. GAO, Obligations Limitation . . . as of March 31, 1990; June 30, 1990; September 30, 1990; 

December 31, 1990; March 31, 1991 (1990, 1991, 1992) 

a Calculation includes $18.8 billion in Treasury contributions. 

FDIC BANKING REVIEW 53 2006, VOLUME 18, NO. 2 
The Resolution Trust Corporation and Congress, 1989–1993 

$30 billion more in loss funds.102 In April, the 

GAO followed with another increased estimate of 

the cost.103 In May, the Bush administration presented Congress with a revised estimate of the 

costs, stating that the current worst-case scenario 

might entail another $57 billion. Commentators at 

the time felt that Treasury was at last presenting 

realistic estimates of the cost, perhaps to ensure 

that no higher estimates would have to be 

announced as the 1992 presidential campaign got 

under way. Treasury Secretary Brady told Congress 

that the administration would accept either an 

open-ended appropriation or some set figure, and 

would leave it up to Congress to decide.104 

Democrats criticized the administration for its conduct and were particularly unreceptive to the 

notion of open-ended appropriations.105 Even 

some Republicans were unhappy with such a 

course.”106 Although it does not appear that the 

administration was seriously considering another 

off-budget vehicle, one Democrat fired a warning 

shot with a bill providing that any future funding 

had to use direct Treasury appropriation.107 As 

summer ended, Seidman informed the House Ways 

and Means Committee that the RTC would need 

$30–$40 billion in new loss fund appropriations for 

the next fiscal year, noting, “Unfortunately, when 

it comes to loss funds, there really are no alternatives . . . [they] will have to come from the American taxpayer.”108 Seidman’s request was endorsed 

by both the GAO and CBO, both of which argued 

that the slowdown caused by lack of funds could 

significantly increase the cost of the S&L 

cleanup.109 

With the session drawing to a close, Congress 

finally turned to the problem of the loss funds. On 

October 10, Brady wrote to both of the Banking 

Committees, noting that “RTC case resolution will 

virtually cease within the next two months unless 

additional funds are provided.” He requested legislation providing $40 billion and removing the 

FIRREA note cap provisions; alternatively, if Congress chose to maintain the note cap, he requested 

$57 billion. The Senate Banking Committee 

moved quickly to mark up a bill (S.3222) providing the $57 billion. There was some Democratic 

dissent, but the Senate was clearly willing to 

appropriate the amount requested by the administration.110 

The House, however, was not. House Banking 

Committee chairman Gonzalez was angered by 

Nicholas Brady’s refusal to appear before his committee; the refusal prompted him to cancel a 

planned hearing on October 17. He responded by 

stopping work on a markup of the RTC funding 

bill. With congressional elections imminent, politics likely played a role here: Gonzalez and House 

Democrats wanted another opportunity to associate the funding request with the administration, 

and Brady undoubtedly did not relish the thought 

of appearing before the committee and serving as a 

target for attacks on the handling of the cleanup. 

Gonzalez claimed that the administration wanted 

to “slip this through without any real oversight,” 

saying he had never seen a request for authorization of funds “without the accompanying willingness of an agency or department head to defend [it] 

. . . in open session.” The Treasury Department’s 

view was that the committee had all the information it needed to make its decision and that it was 

the committee’s responsibility to act.111 

Gonzalez eventually relented—somewhat. The 

House Banking Committee moved on a bill that 

would provide only interim funding of $10 billion 

102 Paulette Thomas, “Resolution Trust Expected to Offer an Alternative to 

Cheap Liquidation,” Wall Street Journal (March 20, 1990).
 

103 Robert M. Garsson, “Pols Shrug Off GAO Estimate of Bailout Cost,”
 

American Banker (April 10, 1990). 


104 Nathaniel C. Nash, “Savings Failures Expected to Soar, the Treasury Says,”
 

New York Times (May 24, 1990).
 

105 Charles Schumer, “The S&L Horror Show: Act II,” New York Times (July 24,
 

1990).
 

106 “Treasury Scrambling for Funds for RTC,” National Mortgage News (August
 

6, 1990).
 

107 See H.R. 5029, Resolution Trust Corporation Financing Amendments of
 

1990, introduced on June 13, 1990, by Rep. Paul Slattery. The bill was never
 

acted on.
 

108 Paulette Thomas, “Seidman Totals Growing Costs of S&L Rescue—Congress,
 

in Election Year, Concocts New Tax Ideas Aimed at Paying the Tab,” Wall
 

Street Journal (September 20, 1990).
 

109 Stephen Labaton, “Savings Bailout Chief Asks for $100 Billion,” New York
 

Times (September 20, 1990).
 

110 U.S. Senate Committee on Banking, Housing, and Urban Affairs, Resolution
 

Trust Corporation Funding Act of 1990 (October 19, 1990).
 

111 Stephen Labaton, “Savings Bailout May Be Hindered By Political Impasse
 

Over Money,” New York Times (October 19, 1990), and “A Patrician and
 

Populist Clash in Savings Bailout,” New York Times (October 22, 1990).
 

2006, VOLUME 18, NO. 2 54 FDIC BANKING REVIEW 
The Resolution Trust Corporation and Congress, 1989–1993 

(although it also addressed the $18.8 billion loophole discussed above).112 The bill also required 

that any additional request for funds be submitted 

to both Banking Committees and contain a complete six-month financial plan detailing how the 

monies would be spent.113 The measure was 

approved by the committee on October 23, but 

not without opposition: Democratic Rep. Doug 

Barnard said that “if you want to keep them on a 

real short leash, you shouldn’t give them anything.” Even some Republicans positioned themselves against RTC funding, with Rep. Toby Roth 

arguing against passing even the $10 billion interim funding.114 

The Senate realized that, with little time left in 

the session, there was not much likelihood of reconciling two very disparate bills. Accordingly, it 

amended its bill by replacing it with a measure 

essentially identical to that passed by the House 

committee (providing only $10 billion in interim 

funding). Riegle noted that this would keep the 

RTC on a very tight leash and ensure that RTC 

funding would be one of the first measures to confront the new Congress. He expressed some dismay that they were not providing more money.115 

The bill passed the Senate on a voice vote. However, the House failed to pass the legislation. 

Reports suggested that the bill had been toppled by 

a procedural objection from Annunzio, but at the 

time some thought that there might not have been 

enough votes for passage anyway.116 The House’s 

inaction ensured that Congress would not block 

the use of the $18.8 billion loophole, for use of the 

loophole allowed Congress to postpone dealing 

with the loss-funding issue without forcing the 

RTC to cease resolving thrifts and would give legislators the ability to address funding early in the 

new Congress.117 

112 See H.R. 5891. 

113 See U.S. House Committee on Banking, Finance and Urban Affairs,
 

Resolution Trust Corporation Funding Act of 1990 (October 27, 1990).
 

114 Stephen Labaton, “House Panel Approves More Funds for Bailout,” New
 

York Times (October 24, 1990).
 

115 Congressional Record. S. 17722 (October 27, 1990).
 

116 Paul Duke, Jr., “Congress Fails to Provide More Funding for S&L Bailout,
 

Raising Threat to RTC,” Wall Street Journal (October 29, 1990).
 

117 Gonzalez said he wanted to begin hearings after the election and before
 

the new Congress was seated (Barbara Rehm and Robert M. Garsson,
 

“Gonzalez Urges Hearings This Fall on RTC,” American Banker [October 31,
 

1990]). 


FDIC BANKING REVIEW 55 2006, VOLUME 18, NO. 2 
The Resolution Trust Corporation and Congress, 1989–1993 

BIBLIOGRAPHY 

Note: The bibliography below provides the sources used for Parts I and II of this article. 

Although some of these materials are not referred to in Part I, the complete bibliography is provided for the reader. 

RTC Manuscripts 

RTC. Board Meeting Transcripts. 1989–1991.
 

RTC. Legislative History Files. (LEGH 68). 1990–1992.
 

RTC. Transition Briefing Books. 1991–1993. 


RTC. “CEO Management Information.” 1993–1994.
 

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U.S. House. 	 H.R. 3469. Federal Agency Debt Management Act. 101st Cong., 1st sess., October 13, 1989. 

———. H.R. 4127. Resolution Trust Corporation Reform Act of 1990. 101st Cong., 2nd sess., 

February 27, 1990. 

———. H.R. 4386. Resolution Trust Corporation Reorganization Act. 101st Cong., 2d sess., 

March 27, 1990. 

———. H.R. 4851. Financial Institutions Oversight Reform Act of 1990. 101st Cong., 2d sess., 

May 17, 1990. 

———. H.R. 5029. Resolution Trust Corporation Financing Amendments of 1990. 101st Cong., 

2d sess., June 13, 1990. 

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22, 1990. 

———. H. Res. 105. Providing for the Consideration of the Bill (H.R. 1315) to Provide Additional Funding for the Resolution Trust Corporation. 102d Cong., 1st sess., March 7, 1991. 

———. H.R. 3303. Resolution Trust Corporation Reorganization and Accountability Act of 1991. 

102d Cong., 1st sess., September 11, 1991. 

———. H.R. 3356. Resolution Trust Corporation Refinancing Act of 1991. 102d Cong., 1st 

sess., September 17, 1991. 

———. H.R. 3422. Resolution Trust Corporation Reform and Accountability Act of 1991. 102d 

Cong., 1st sess., September 26, 1991. 

———. 	 H.R. 3449. Resolution Trust Corporation Amendments Act of 1991. 102d Cong., 1st 

sess., October 1, 1991. 

2006, VOLUME 18, NO. 2 56	 FDIC BANKING REVIEW 
The Resolution Trust Corporation and Congress, 1989–1993 

———. H.R. 3798. Real Estate Recovery Act of 1991. 102d Cong., 1st sess., November 18, 

1991. 

———. H.R. 4765. Resolution Trust Corporation Funding and Cost Reduction Act of 1992. 

102d Cong., 2d sess., April 3, 1992. 

———. H.R. 4924. Resolution Trust Corporation Reform Act of 1992. 102d Cong., 2d sess., 

April 9, 1992. 

———. H.R. 5544. Resolution Trust Corporation Cost Reduction Act. 102d Cong., 2d sess., 

July 2, 1992. 

———. H.R. 5603. Resolution Trust Corporation Loss Reduction and Funding Act of 1992. 

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———. H.R. 5629. Resolution Trust Corporation Asset Recovery Act of 1992. 102d Cong., 2d 

sess., July 21, 1992. 

U.S. Senate. S. 2155. Resolution Trust Corporation Reorganization Act. 101st Cong., 2d sess., 

February 21, 1990. 

———. S. 3112. Savings and Loan Simplification Act of 1990. 101st Cong., 2d sess., September 26, 1990. 

———. S. 3222. Resolution Trust Corporation Funding Act. 101st Cong., 2d sess., October 28, 

1990. 

———. S. 389. Resolution Trust Corporation Reorganization Act. 102d Cong., 1st sess., February 7, 1991. 

———. S. 1943. Resolution Trust Corporation Reform Act of 1991. 102d Cong., 1st sess., 

November 7, 1991. 

———. S. 419. Resolution Trust Corporation Funding Act of 1991. 102d Cong., 1st sess., February 14, 1991. 

———. 	 S. 572. Savings and Loan Simplification Act of 1991. 102d Cong., 1st sess., March 6, 

1991. 

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U.S. House. Providing for the Consideration of H.R. 1315. Report (to accompany H. Res. 105), 

102d Cong., 1st sess., H. Rpt. 102-13, March 7, 1991. 

———. Resolution Trust Corporation Funding Act of 1991, Conference Report. 102d Cong., 1st 

sess., H. Rpt. 102-7, March 19, 1991. 

———. 	Resolution Trust Corporation Completion Act. Report. 103d Cong., 1st sess., H. Rpt. 

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Resolution Trust Corporation. 101st Cong., 2d sess., Ser. No. 101-69, January 23–25, 

1990. 

———. 	Semiannual Report and Appearance by the Oversight Board of the Resolution Trust Corporation. 101st Cong., 2d sess., Ser. No. 101-33, June 14, 1990. 

FDIC BANKING REVIEW	 57 2006, VOLUME 18, NO. 2 
The Resolution Trust Corporation and Congress, 1989–1993 

———. Funding the Resolution Trust Corporation: Hearing. 101st Cong., 2d sess., Ser. No. 

101-160, July 30, 1990. 

———. Resolution Trust Corporation Funding Act of 1990: Report. 101st Cong., 2d sess., H. 

Rpt. 101-974, October 27, 1990. 

———. Semi-Annual Appearance of the Resolution Trust Corporation Oversight Board: Hearing. 

102d Cong., 1st sess., Ser. No. 102-2, January 31, 1991. 

———. General Accounting Office Report Card on RTC Operations: Hearing. 102d Cong, 1st 

sess., Ser. No. 102-5, February 20, 1991. 

———. RTC Semiannual Report for Period Ending April 30, 1991: Hearing. 102d Cong., 1st 

sess., Ser. No. 102-54, July 11, 1991. 

———. Semiannual Appearance of the Thrift Depositor Protection Board: Hearing. 102d Cong., 

2d sess., Ser. 102-140, July 29, 1992. 

———. Semiannual Appearance of the Thrift Depositor Protection Oversight Board: Hearing. 

103d Cong., 1st sess., Ser. No. 103-18, March 16, 1993. 

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Institutions Supervision, Regulation and Insurance. Resolution Trust Corporation Refinancing and Restructuring Issues: Hearing. 102d Cong., 1st sess., Ser. No. 102-70, September 12 and 17, 1991. 

———. 	Resolution Trust Corporation Funding Act of 1992: H.R. 4241: Hearing. 102d Cong., 

2d sess., Ser. No.102-102, February 26, 1992. 

U.S. House Committee on Banking, Finance and Urban Affairs, Subcommittee on Financial 

Institutions Supervision, Regulation and Deposit Insurance. Funding Needs of the Resolution Trust Corporation and Savings Association Insurance Fund: Hearing. 103d Cong., 

1st sess., Ser. No. 103-19, March 17 and 18, 1993. 

U.S. House Committee on Banking, Finance and Urban Affairs, Subcommittee on Financial 

Institutions Supervision, Regulation and Insurance, Resolution Trust Corporation 

Task Force. Status and Activities of the RTC and the Oversight Board: Hearings. 101st 

Cong., 1st sess., Ser. No. 101-55, October 4 and 19; November 6 and 13, 1989. 

———. Disposition of Assets by the Resolution Trust Corporation: Hearing. 101st Cong., 2d sess., 

Ser. No. 101-102. (March 27, 1990). 

———. Disposition of Assets by the RTC: Hearing. 101st Cong., 2d sess., Ser. No. 101-122. 

May 4, 1990. 

———. Alternative Financing Options for the Savings and Loan Cleanup Costs: Hearing. 101st 

Cong., 2d sess., Ser. No. 101-174. (September 26, 1990). 

———. 	Consideration of the Implications of the RTC Control Problems for Proposals to Restructure the Bail-out Machinery. 102d Cong., 1st sess., Ser. No. 102-51, June 17, 1991. 

U.S. House Committee on Banking, Finance and Urban Affairs, Subcommittee on General 

Oversight and Investigations. Resolution Trust Corporation’s Asset Disposition Policies: 

Hearing. 102d Cong., 1st sess., Ser. No. 102-68. (September 6, 1991). 

———. 	The RTC’s Operation Western Storm: Hearing. 102d Cong., 2d sess., Ser. No. 102­

144, August 6, 1992. 

2006, VOLUME 18, NO. 2 58	 FDIC BANKING REVIEW 
The Resolution Trust Corporation and Congress, 1989–1993 

U.S. House Committee on Banking, Finance and Urban Affairs, Subcommittee on General 

Oversight, Investigations, and the Resolution of Failed Financial Institutions. Professional Liability and RTC Contracting with Lawyers: Hearing. 103d Cong., 1st sess., Ser. 

No. 103-22, March 30, 1993. 

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101-125, September 19, 1990. 

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Borrowing and Loan Guarantees in Resolving Insolvent Thrift Institutions: Hearing on 

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Agencies from Increasing Debt through Unauthorized Borrowing. 101st Cong., 1st sess., 

Ser. No. 101-68, October 31, 1989. 

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Hrg. 101-738, January 31, 1990. 

———. Hearing on the Semiannual Report of the Resolution Trust Corporation. 101st Cong., 2d 

sess., S. Hrg. 101-974, May 23, 1990. 

———. Resolution Trust Corporation Funding Act of 1990: Report. 101st Cong., 2d sess., S. 

Rpt. 102-13, October 19, 1990. 

———. Hearing on the Semiannual Report of the Resolution Trust Corporation, 1991. 102d 

Cong., 1st sess., S. Hrg. 102-54, January 23, 1991. 

———. Restructuring the Resolution Trust Corporation and the Semiannual Report on FIRREA 

Legislation: Hearing. 102d Cong., 1st sess., S. Hrg. 102-465, June 11, 21, and 26, 1991. 

———. Refunding the RTC: Hearing. 102d Cong., 1st sess., S. Hrg. 102-535, October 24, 

1991. 

———. Nomination of Albert V. Casey: Hearing. S. Hrg 102-668, 102d Cong., 2d sess., January 22, 1992. 

———. Hearing on the Semiannual Report of the Resolution Trust Corporation—1993. 103d 

Cong., 1st sess., S. Hrg. 103-58, March 17, 1993. 

———. 	Thrift Depositor Protection Act of 1993: Report. 103d Cong., 1st sess., S. Rpt. 103-36, 

April 1, 1993. 

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Corporation: Hearing. 102d Cong., 1st sess., S. Hrg. 102-141, June 19, 1991. 

———. 	Oversight Structure of the RTC: Hearing. 102d Cong., 1st sess., S. Hrg. 102-513, 

October 23, 1991. 

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FDIC BANKING REVIEW	 59 2006, VOLUME 18, NO. 2 
 

The Resolution Trust Corporation and Congress, 1989–1993 

Periodicals 

American Banker. 1989–1993. http://www.lexisnexis.com.
 

BNA’s Banking Report. 1989–1993.
 

National Mortgage News. 1989–1993. http://www.lexisnexis.com.
 

New York Times. 1989–1993. http://www.lexisnexis.com.
 

Wall Street Journal. 1989–1993. http://www.factiva.com.
 

Washington Post. 1989–1993. http://www.lexisnexis.com.
 

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———. Almanac: 103rd Congress, 1st Session, 1993. Vol. 49. Congressional Quarterly. 1994. 

Davison, Lee. “Politics and Policy: The Creation of the Resolution Trust Corporation.” FDIC 

Banking Review 17, no. 2 (2005): 18–44. 

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Successes, and Lessons Learned. Unpublished FDIC paper. 2003. 

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———. Annual Report 1990. 1991. 

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———. Obligations Limitation: Resolution Trust Corporation’s Compliance as of June 30, 1990. 

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———. Obligations Limitation: Resolution Trust Corporation’s Compliance as of December 31, 

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