posit Insuranc

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Federal Deposit Insurance Corporation

FDIC
 

Banking

Review
 2000
 

Volume 13, No. 2
 

De e

Coverage

C st of the S L C isis

R cen D vel pments

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Deposit Insurance 

Coverage 

Cost of the S&L Crisis 

Recent Developments 
Table of Contents 

FDIC
 

Banking

Review
 2000
 

Volume 13, No. 2
 

Chairman 

Donna Tanoue 

Division of Research 

and Statistics, 

Director 

Wm. Roger Watson 

Deputy Director 

Barry Kolatch 

Editor 

James A. Marino 

Managing Editors 

Detta Voesar
 

Lynne Montgomery
 

Editorial Secretary 

Cathy Wright
 

Design and Production
 

Geri Bonebrake
 

Cora Gibson
 

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 Research and 

Statistics with a copy of any 

publications containing reprinted material. 

Single-copy subscriptions 

are available to the public 

free of charge. Requests for 

subscriptions, back issues 

or address changes should 

be mailed to: FDIC Banking 

Review, Office of Corporate 

Communications, Federal 

Deposit Insurance Corporation, 550 17th Street, N.W., 

Washington, DC 20429. 

A Historical Perspective on Deposit Insurance Coverage 

by Christine M. Bradley Page 1 

The author examines the federal deposit insurance program and traces 

deposit insurance coverage from its original amount of $2,500 in 1934 

through each subsequent increase to the current coverage amount of 

$100,000. The article is intended to provide a background for the current 

debate on increasing deposit insurance coverage. 

The Cost of the Savings and Loan Crisis: Truth and 

Consequences 

by Timothy Curry and Lynn Shibut Page 26 

The authors identify and analyze the cost of providing deposit insurance 

during the savings and loan crisis of the 1980s and early 1990s. They 

provide a breakdown of the cost into the FSLIC and RTC segments, and 

also identify the portions of the cost borne by the taxpayer and by the thrift 

industry. 

Recent Developments Affecting Depository Institutions 

by Lynne Montgomery Page 36 

This regular feature of the FDIC Banking Review contains information on 

regulatory agency actions, state legislation and regulation, and articles and 

studies pertinent to banking and deposit insurance issues. 
Deposit Insurance Coverage 

A Historical Perspective
 

on Deposit Insurance
 

Coverage
 

by Christine M. Bradley*
 

Since 1980, deposit accounts held in federally 

insured depository institutions have been protected by deposit insurance for up to $100,000. 

Now attention is being directed at deposit insurance 

reform, and questions have been raised as to whether 

the current insurance limit is sufficient. 

This article traces the deposit-insurance limitation 

from its original figure of $2,500, adopted in 1933, 

through each subsequent increase up to the current 

coverage. The article is intended to serve only as 

background for discussions of whether an increase is 

appropriate and does not draw any conclusion on 

whether such an increase is justified. 

The first section of this article recounts the events 

that made enactment of federal deposit insurance 

inevitable in 1933, when at least 149 previous proposals had been considered over 57 years and failed.1 

The second section focuses on the enactment of the 

Banking Act of 1933 and the adoption of a federal 

insurance program. The third section of the paper 

concentrates on the limitations Congress imposed on 

insurance coverage, beginning with the initial limitation and proceeding through six increases (in 1934, 

1950, 1966, 1969, 1974 and 1980). The discussion centers on the rationale(s) for each of the limits set. Some 

concluding remarks are contained in the fourth section. 

BACKGROUND: 1920–1933 

The high prosperity and steady economic growth 

that the United States enjoyed for most of the 1920s 

came to a halt in 1929.2 Although the mere mention 

of 1929 brings to mind the dramatic stock market 

crash, the October crash had been preceded by 

declines in other economic indicators. From August 

through October of that year, production had fallen at 

an annualized rate of 20 percent, and wholesale prices 

and personal income had fallen at annualized rates of 

7.5 percent and 5 percent, respectively.3 But despite 

the general downward trend of the economy, it was the 

stock market crash that resulted in what has been 

called “an oppression of the spirit.”4 

* Christine M. Bradley is a senior policy analyst in the FDIC’s Division 

of Research and Statistics. The author would like to thank the following people for their comments and suggestions: Lee Davison, David 

Holland and James Marino. She would also like to acknowledge the 

assistance provided by the FDIC Library staff, especially Alicia Amiel. 

1 Kennedy (1973), 215; FDIC (1950), 80–101. 

2 The country suffered recessions in 1924 and 1927, but both were so 

mild that ordinary citizens were unaware that they had occurred. See 

Friedman and Schwartz (1993), 296. 

3 Ibid., 306. 

4 Kennedy (1973), 18. 

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FDIC Banking Review 

The nation’s financial sector had not been impervious to the effects of the worsening economy: bank 

suspensions were numerous throughout the 1921– 

1929 period. Nonetheless, the suspensions were easy 

to dismiss as regional issues because the closings were 

locally contained. From 1923–1924, for example, the 

number of bank suspensions rose in the Central 

United States because of problems in the agricultural 

sector, and suspensions in 1926 increased in the South 

Atlantic states largely because of the collapse of realestate prices in Florida.5 Although no banking panic 

immediately followed the stock market crash, in early 

1930 the rate of bank failures began to increase over 

broader geographic areas of the country. 

As the number of bank suspensions increased, fear 

spread among depositors. But the bank failure that 

did most to undermine confidence in the financial sector was that of the Bank of United States in December 

1930. Although the Bank of United States was the 

largest commercial bank to have failed up to that time 

in U.S. history,6 the effect of its failure was magnified 

by its name, which led many to believe (erroneously) 

that it was affiliated with the U.S. government. 

Additionally, when the Federal Reserve Bank of New 

York was unsuccessful in attempts to rally support to 

save the institution, the bank’s closing contributed to 

a growing lack of confidence in the Federal Reserve 

System.7 

The pressures that led to the failure of the Bank of 

United States, and that were felt in the financial sector 

as a whole throughout the closing months of 1930, 

moderated in the next year. By early 1931, the number of bank failures had sharply declined, and other 

indicators of economic activity also showed some 

improvement. Nevertheless, in January 1931 the U.S. 

Senate began hearings on the banking situation.8 

Deposit insurance was not one of the designated subjects of these hearings but the number of bank failures 

and the inability of depositors to gain access to their 

deposits demanded attention. During the hearings 

some thought was given to setting up a fund to take 

charge of failed institutions and pay off depositors and 

stockholders immediately,9 but given the signs of 

improvement shown by economic indicators compared with the low figures of late 1930, no sense of 

urgency developed.10 

By late March 1931, as if on a seesaw, the number of 

bank failures began to rise again.11 This time members of the public reacted almost immediately by converting their deposits into currency.12 By November 

1931, almost one-half billion dollars had gone into hiding.13 Some depositors who had withdrawn their 

funds looked for alternatives to keeping their money 

at home. Postal savings banks (PSBs) had been established in 1910 as a small-scale program for low-income 

savers, but PSBs were limited in their ability to compete with commercial banks because accounts in PSBs 

were limited to a maximum of $2,500.14 However, as 

depositors became disillusioned with the more traditional depository institutions, PSBs seemed a safe 

alternative, especially because they were in effect 

operated by the government and enjoyed a government guarantee. Between March 1929 and year-end 

1931, time deposits held by PSBs increased by nearly 

400 percent,15 whereas the deposits held by member 

and nonmember banks fell by almost 20 percent 

between January 1929 and year-end 1931.16 It was 

apparent that something had to be done with the 

increasingly precarious condition of the U.S. banking 

system. 

Action was taken on several fronts in an effort to 

revive the banking industry. In August 1931, the 

Federal Reserve Bank of New York requested that a 

5 During the 1931 Senate hearings concerning the condition of the 

banking system (discussed below), bank failures were seen as the 

result of a change in economic conditions brought about by the use of 

the automobile. With the advent of the automobile and improved 

roads, depositors were more readily able to get to larger towns and 

larger banks and many smaller, rural banks were no longer needed. 

Since many of the smaller banks operated with limited capital, they 

were unable to adjust. U.S. Senate Committee on Banking and 

Currency (1931), 44–45. 

6 As measured by volume of deposits. Friedman and Schwartz (1993), 

309–10. 

7 Ibid., 309–11, 357–59. 

8 U.S. Senate Committee on Banking and Currency (1931). 

9 Ibid., 332. 

10 Friedman and Schwartz (1993), 313. 

11 Federal Reserve Board of Governors (1931), 126. 

12 Another factor that added to the increasing withdrawals from commercial banks was fear on the part of foreign depositors that the 

United States was going to abandon the gold standard much as Great 

Britain had in September 1931. See, for example, Friedman and 

Schwartz (1993), 315–18. 

13 Kennedy (1973), 30. 

14 The limit on accounts held by the PSBs was originally set at $500. In 

1918, the amount was raised to $2,500. PSBs were solely deposit-taking institutions and were not authorized to lend money to individuals. 

For details about the history of the PSBs, see the third section of this 

article. 

15 Federal Reserve Board of Governors (1934), 170. 

16 Ibid., 163. 

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Deposit Insurance Coverage 

group of member banks purchase the assets of failed 

banks so that depositors could immediately be 

advanced a portion of their funds. President Herbert 

Hoover urged the formation of the National Credit 

Corporation (NCC). Although the NCC was created 

in October 1931 with President Hoover’s encouragement, it was a private organization of banks that provided loans to individual banks against sound but not 

readily marketable assets. It had been envisioned as a 

form of bankers’ self-help: The financial structure of 

weaker institutions would be strengthened with the 

aid of stronger ones. Whether the NCC was successful to any degree is open to question. Friedman and 

Schwartz claim that the group of bankers forming the 

NCC gave up almost immediately and demanded 

direct government action.17 Nonetheless, contemporaries maintained that, even though the funds actually 

loaned by the NCC were minimal, the formation of 

the group had a beneficial psychological effect and 

tended to restore the confidence of both bankers and 

depositors.18 In any case, within two weeks of the 

NCC’s creation, bank failures as well as bank withdrawals declined.19 

The calm that followed the establishment of the 

NCC did not last. In December 1931 another wave of 

bank failures began, making direct government intervention unavoidable. In January 1932, the Reconstruction Finance Corporation (RFC) was established 

as part of President Hoover’s 18-point program to combat the economic depression. The RFC was developed partly in response to a general feeling that any 

possible recovery was being hampered by the huge 

volume of deposits that remained tied up in unliquidated banks. The RFC began making loans in 

February 1932. Within four months it had approved 

$5 billion worth of loans. The recipients of these 

funds included—in addition to agencies, agricultural 

credit corporations, and life insurance companies— 

4,000 banks.20 

But the RFC opened itself up to criticism almost 

immediately when several of its first loans went to 

huge financial institutions rather than to smaller institutions. Further damage was done when the RFC 

loaned funds to an institution headed by its former 

president just weeks after he had left the corporation; 

the ensuing scandal escalated into a run on banks in 

the Chicago area.21 With the RFC’s practices under 

attack, Congress elected to provide some oversight, 

and in the summer of 1932 it required the RFC to provide the Senate with a list of all the recipients of its 

loans.22 

In the same month that the RFC began making 

loans (February 1932), Congress passed the GlassSteagall Act in a further attempt to reinvigorate the 

financial sector. The 1932 law broadened the circumstances under which banks could borrow from the 

Federal Reserve System and increased the amount of 

collateral the Federal Reserve System could hold 

against Federal Reserve notes.23 The creation of the 

RFC, the enactment of Glass-Steagall, and a concomitant reduction in the number of bank failures somewhat restored the public’s confidence in the U.S. 

banking sector, and an inflow of bank deposits resulted.24 

Nevertheless, bankers remained uncertain about 

the timing and level of future withdrawals and continued to keep ever-larger reserve accounts. Between 

July and December 1932, member banks increased 

their holdings of U.S. government securities by $912 

million.25 At the end of 1932, member bank balances 

exceeded the required reserve by $5.75 million.26 

Between March 1929 and year-end 1932, loans made 

by member and nonmember banks fell by 64 percent.27 A report on the causes of the economic depression by the National Industrial Conference Board 

stated that “the course of the present depression has 

been made deeper by the failure of the banking system at large to extend credit accommodation to industry and trade as a whole.”28 

In January 1933, congressional hearings that had 

originally been intended to look into stock exchange 

practices crossed over into an investigation of the 

banking industry. Before the hearings ended, banking 

customers had been painted as victims, while bankers 

17 Friedman and Schwartz (1993), 320.
 

18 See Kennedy (1973), 35; U.S. Committee on Banking and Currency 68
 

(1932) (statement of George L. Harrison). 

19 Wicker (1996), 95–97. 

20 Kennedy (1973), 39. 

21 Ibid., 39–45. 

22 Ibid., 37–45. Consequences of the publication of the list of loan recipients are discussed below. See text accompanying note 31. 

23 Public Law 72-44, Statutes at Large 47 (1932): 56–57 (codified as 

amended at 12 U.S.C. §§ 347a, 347b, and 412 (1989)). Note: There 

are two pieces of Glass-Steagall legislation. The 1932 legislation is 

distinct from the better known Glass-Steagall Act that was part of the 

Banking Act of 1933. The 1933 legislation was generally concerned 

with separating commercial and investment banking activities. Public 

Law 73-66, Statutes at Large 48 (1933): 162 (codified as amended in 

scattered sections of 12 U.S.C.). In this article, Glass-Steagall refers 

to the provisions of the 1932 law. 

24 Federal Reserve Board of Governors (1932b), March, 141. 

25 Federal Reserve Board of Governors (1933a), 6. 

26 Ibid., 1. 

27 Federal Reserve Board of Governors (1934), 161. 

28 Kennedy (1973), 130. 

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FDIC Banking Review 

had come to be seen as profiteers who were unfavorably compared to Al Capone.29 At any other time the 

hearings would probably not have had a significant 

effect on the banking sector, but coming on the heels 

of four years of turmoil in the industry, the hearings 

reinforced the public’s distrust of the U.S. banking 

system and nourished existing hostilities.30 

Any hope that tensions would ease before the new 

president (Franklin Roosevelt) took office in March 

1933 vanished when the House of Representatives 

ordered the RFC to release a report of its operations. 

Included in the report was a list of the banks that had 

received loans from the RFC. President Hoover had 

warned against such a release, and much as he predicted, the public panicked when they assumed that 

any institution requiring a loan from the RFC was in 

jeopardy of failing—heavy withdrawals followed.31 

But unlike earlier crises, this time even banks that had 

turned themselves around were hit hard with withdrawals. 

By the end of January 1933, the banking crisis had 

reached such a point that closing the banks appeared 

to be the only option. In many cities, individual statechartered banks had already restricted withdrawals. 

Many states were facing statewide bank holidays, and 

restrictions on national banks’ ability to limit withdrawals were removed in February 1933. A national 

bank was now able to limit or restrict withdrawals 

according to the terms allowed for state banks located 

within the same state.32 

Having been defeated in the presidential election, 

President Hoover would not take any action without 

the support of the president-elect and Congress or the 

Federal Reserve Board. President Hoover made it 

clear that he favored some form of federal guarantee of 

deposits instead of declaring a national banking holiday, but support for action was not forthcoming. As a 

result, he left office without either declaring a national banking holiday or proposing federal deposit insurance. The failure of the federal government to take 

action forced the states to act, and by March 4, 1933, 

all 48 states had declared some form of banking holiday or had otherwise restricted deposits.33 

March 1933 

By March 4, 1933, when Franklin Roosevelt took 

the oath of office as president, the national income had 

fallen 53 percent below what it was in 1929, and 

wholesale prices had fallen almost 37 percent; the 

national debt had increased 20.7 percent above what it 

was in 1929, and security prices had fallen to approximately one-fourth the prices of 1929.34 Since the 

beginning of 1929, 6,169 banks had suspended operations.35 Some observers maintained that Roosevelt 

took office without fully appreciating the extent of the 

crisis that was overwhelming the financial sector of the 

country.36 They believed that he thought the banking 

system needed only minor adjustments and as a result 

he had no plan for restoring the system to working 

order.37 Nonetheless, President Roosevelt knew that 

he had to assume national leadership if order was 

going to be restored to the country. Within days of taking office he declared a national banking holiday, 

announcing that banks would be closed from March 7, 

1933, until March 9, 1933. President Roosevelt knew 

that a limited closure would not be enough, but he also 

realized that to suspend banking indefinitely would be 

unwise.38 Ultimately the banks remained closed until 

March 13, 1933. 

After taking steps to stall the deterioration of the 

banking industry, President Roosevelt recognized that 

it was vital that currency be returned to the banking 

system when the banks were reopened. For this to 

happen, he knew that depositors’ confidence had to 

be restored. Accordingly, he pledged that only safeand-sound banks would be reopened, and immediately announced a schedule for their reopening.39 The 

public responded. Between March 13 and March 30, 

1933, currency in circulation declined by $600 million 

as funds were redeposited.40 Realizing that the banking industry had narrowly escaped total disaster, 

29 See, for example, Commonweal (1933), 535. 

30 President Hoover originally requested the hearings in 1932, but congressional recesses and political maneuvering delayed them until 

1933. When the hearings began to delve into banking practices, 

Ferdinand Pecora became counsel of the subcommittee and was primarily responsible for them. As a result, the hearings became known 

as “the Pecora hearings.” They ran until March 1933. For a thorough 

discussion of the hearings, see Kennedy (1973), 103–28. 

31 See text accompanying note 22. 

32 Nevada had declared a statewide banking holiday on October 31, 

1932, when runs on several individual banks threatened to develop 

into runs throughout the state. But not until February 1933 had conditions nationwide deteriorated to the point that a majority of states 

were considering banking holidays. 

33. Wicker (1996), 128–29. 

34 Kennedy (1973), 153; Federal Reserve Board of Governors (1933b), 

462. 

35 Federal Reserve Board of Governors (1937), September, 867; (1934), 

206. 

36 See Kennedy (1973), 164, 168. 

37 See Phillips (1995), 33. 

38 Roosevelt (1934), 17–18. 

39 On March 7, 1933, 17,032 banks suspended activity. On March 12, 

12,817 of them were licensed to reopen. By the end of 1933, 1,105 of 

the original group had been placed into liquidation. Wicker (1996), 

146–47. 

40 Ibid., 147. 

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Deposit Insurance Coverage 

President Roosevelt knew that if any licensed bank 

were again closed after the banking holiday, another 

and far more serious crisis would develop. The government had no choice but to stand behind every bank 

that had reopened. 

THE BANKING ACT OF 1933 

When the banks reopened, the country enjoyed a 

surge of confidence in its financial system and in its 

future. But President Roosevelt understood that, 

although the banking holiday had cut short the crisis, 

the underlying system that had allowed the panic to 

develop had not been altered. By the spring of 1933, 

just two months after the banking holiday, Congress 

was ready to acknowledge that permanent changes 

had to be made to the banking system, and by June 

the Banking Act of 1933 (Banking Act) was law.41 

Although the Banking Act was mainly concerned with 

ensuring that bank funds were not used for speculative purposes, the legislation also provided for federal 

deposit insurance. 

The federal insurance program was not the first program in the United States to guarantee deposits. 

Deposit accounts had previously been insured under 

state systems, but by 1929 all the state systems were 

either insolvent or inoperative.42 In 1932 a bill for federal deposit insurance sponsored by Representative 

Henry Steagall passed in the House of Representatives but went nowhere in the Senate, largely 

because of the opposition of Senator Carter Glass.43 

Senator Glass instead supported a liquidating corporation that would give depositors of a failed bank their 

expected recovery almost immediately and thereby 

quickly return the funds to the community.44 

President Roosevelt was against providing a government guarantee of bank deposits. He was not alone: 

bankers, including the American Bankers Association, 

opposed an insurance program, maintaining that such 

a program rewarded inept banking operations.45 

Despite this broad-based opposition to federal deposit 

insurance, the combination of public opinion (pressure 

from constituents) and the circumstances of the time 

forced Congress to take action. A federal deposit 

insurance program was adopted less than four months 

after President Roosevelt took office. 

The deposit insurance issue had been thoroughly 

debated in 1931 and 1932.46 The earlier debates indicate that the motives for approving a federal insurance 

program can be generally classified as either to ensure 

monetary stability or to protect the depositor, but in 

the eyes of most, ensuring the continued stability of 

the monetary system was of primary importance.47 As 

was stated in 1932: 

To provide the people of the United States with 

an absolutely safe place and a convenient place 

to put their savings and their deposits is essential to the stability of banking, bank deposits 

and loans, the checks which function as money, 

and business conditions in every line. It is 

essential to the stability, therefore, of manufacturing and distributing goods in this country 

through the merchants and jobbers and wholesalers. It is essential to the maintenance of the 

commodity prices in this country, including . . . 

those things which are produced by the farmers, 

miners, foresters. . . . It is essential to the stability of the income of the Nation. . . . It is a far 

greater matter than the very important end of 

protecting the individual depositor or the bank 

from loss.48 

41 The Banking Act of 1933, ch. 89, Statutes at Large 48 (1933): 162 

(codified as amended in scattered sections of 12 U.S.C.). 

42 See Kennedy (1973), 215; FDIC (1950), 65. 

43 Barr (1964), 53. 

44 Kennedy (1973), 52. 

45 See Kennedy (1973), 215–20; Preston (1933), 598. 

46 U.S. House Committee on Banking and Currency (1932); U.S. Senate 

Committee on Banking and Currency (1931). Since the congressional committee in 1933 referred to the previous hearings and reports 

with approval, much of the discussion in this article relies on these 

records. Federal deposit insurance had been discussed as early as 

1886 and some form of deposit insurance legislation was attempted in 

almost every Congress between that time and 1933, resulting in at 

least 149 other bills before the 1933 legislation. FDIC (1950), 80–101. 

47 The justifications used for enacting federal deposit insurance included the following: (1) to provide protection against bank runs—see, for 

example, 77 Cong. Rec. S3728 (daily ed. May 19, 1933); (2) to ensure 

a steady source of funds as a circulating medium—see, for example, 

77 Cong. Rec. H3839 (daily ed. May 20, 1933); (3) to return funds to 

circulation after bank failure through the prompt payment of depositors—see, for example, 77 Cong. Rec. H5895 (daily ed. June 13, 1933); 

(4) to prevent the evaporation of bank credit—see, for example, U.S. 

House Committee on Banking and Currency (1932), 203–04; (5) to 

protect the small depositor—see, for example, 77 Cong. Rec. H3837 

(daily ed. May 20, 1933); (6) to revive small rural banks—see, for 

example, U.S. House Committee on Banking and Currency (1932), 

253; (7) to encourage bank membership in the Federal Reserve 

System—see, for example, 77 Cong. Rec. S3727 (daily ed. May 19, 

1933); and (8) to provide protection comparable to that given by postal 

savings banks—see, for example, 77 Cong. Rec. H3924 (daily ed. May 

22, 1933). Although each of these was used as a rationale for adopting 

federal deposit insurance, the first four were concerned with ensuring 

monetary stability while the last four were most concerned with protecting the depositor and the banking system. Over the years various 

analysts have emphasized different reasons for the adoption of federal deposit insurance, and no consensus emerges as to the primary factor motivating adoption of the insurance program. See, for example, 

Marlin (1969), 116: deposit insurance was enacted to prevent a recurrence of bank failures; Boulos (1967), 46: to preserve the unit system 

of banking; Golembe (1960), 189: to restore the circulating medium 

to the community after bank failure; and Hotchkiss (1941), 33: to 

restore the public’s confidence in the banking system. 

48 U.S. House Committee on Banking and Commerce (1932), 117 (statement of Senator Robert L. Owen). 

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FDIC Banking Review 

The Banking Act established a temporary plan 

under which deposits were to be insured from January 

1 to July 1, 1934, for up to $2,500 (temporary plan). 

Deposits would have been insured under a permanent 

plan beginning July 1, 1934. The permanent plan 

would have fully insured deposits of less than $10,000; 

deposits between $10,000 and $50,000 would have 

had 75 percent coverage; and deposits over $50,000 

would have had 50 percent coverage. As part of a compromise with Senator Glass, the Banking Act also 

established the Federal Deposit Insurance Corporation (FDIC). One of the functions of the FDIC was to 

liquidate the assets of failed banks and quickly return 

to depositors as much of their funds as the agency 

expected to realize from the liquidation of the failed 

bank’s assets.49 

The temporary plan had been proposed as an 

amendment to the banking bill by Senator Arthur 

Vandenberg, who stated that the plan was created 

under a “temporary formula” pending the effective 

date of the permanent plan. Without the temporary 

plan, deposits would have remained uninsured for one 

year following the bill’s enactment. According to 

Senator Vandenberg, “There is no remote possibility 

of adequate and competent economic recuperation in 

the United States during the next 12 months . . . until 

confidence in normal banking is restored; and in the 

face of the existing circumstances I am perfectly sure 

that the insurance of bank deposits immediately is the 

paramount and fundamental necessity of the 

moment.”50 

DEPOSIT INSURANCE COVERAGE 

1934–1980 

Deposits have never been insured to the degree 

contemplated under the original permanent plan, but 

insurance coverage has been raised from the initial 

$2,500 limitation on six occasions. The reasons for 

each increase have been varied and are often influenced by events or circumstances from outside the 

banking industry. The following section discusses the 

rationale for each of the adjustments to deposit insurance coverage. 

January 1934: Establishment of $2,500 

Deposit Insurance Coverage 

As stated above, the $2,500 insurance coverage 

adopted in 1933 was the result of an amendment that 

was proposed by Senator Vandenberg (Vandenberg 

amendment). He proposed the amendment to 

increase the prospect that a federal insurance program 

would be quickly adopted.51 But providing deposit 

insurance, even at the reduced level, required compromise: Although strong proponents of the insurance 

plan had hoped for an effective date of July 1, 1933, 

they moved the date to January 1, 1934, in order to win 

presidential approval.52 

Limiting the insurance guarantee was essential to 

getting the program passed. By setting a limitation, 

Senator Vandenberg was able to fend off those who 

criticized the federal program as merely replicating the 

earlier unworkable state programs, none of which had 

limited their insurance coverage.53 Additionally, 

Senator Vandenberg’s amendment introduced an 

aspect of depositor discipline into the system by not 

covering all deposits with a guarantee. In this way he 

addressed the concern that deposit insurance would 

eliminate the need for depositors to be cautious in 

deciding where to put their money.54 Although it is 

clear that limiting coverage was key to the program’s 

enactment, it is less clear if the maximum insured 

deposit was set arbitrarily at $2,500. 

49 Public Law 73-66, Statutes at Large 48 (1933): 162.
 

50 77 Cong. Rec. S3731 (daily ed. May 19, 1933).
 

51 77 Cong. Rec. H3906 (daily ed. May 22, 1933).
 

52 The House had signed a pledge not to adjourn until after the bill containing the deposit insurance provisions was passed, but until Senator 

Vandenberg proposed the reduced level of insurance, the bill was in 

jeopardy. According to the New York Herald Tribune, President 

Roosevelt would have been satisfied to shelve the legislation (reported in Financial Chronicle June 17, 1933, p. 4192). Even after the bill 

was amended to limit the deposit insurance guarantee, President 

Roosevelt threatened to veto it if the effective date was not postponed. 77 Cong. Rec. S5256 (daily ed. June 8, 1933). According to 

congressional testimony, the fact that insured banks were required to 

become members of the Federal Reserve System persuaded 

President Roosevelt to support the deposit insurance bill: He thought 

that required membership in the Federal Reserve System would 

result in a unified banking system. U.S. Senate Committee on 

Banking and Currency (1935), 46. 

53 Providing deposit insurance on a federal basis had other advantages 

over the unsuccessful state systems: (1) in a federal system, risk was 

more adequately distributed inasmuch as it covered the entire country (states were not large enough to permit adequate distribution of 

the risk); (2) in a federal system, the insurance fund would be much 

larger relative to the risk incurred; (3) presumably only safe-andsound banks would be participating in the federal system, since only 

solvent banks were reopened after the banking holiday; and (4) political pressure was less apt to affect a federal system. See, for example, 

Preston (1933), 600. 

54 77 Cong. Rec. H4052 (daily ed. May 23, 1933). Congress also saw a 

100 percent guarantee as encouraging laxity on the part of bankers. 

According to Representative John L. Cable, bankers “would be 

inclined to make loans which their good judgment would tell them 

were unsafe. They would feel that they could do this because the 

depositors’ money they would be lending would be completely 

insured.” U.S. House Committee on Banking and Currency (1932), 

114. 

6 
Deposit Insurance Coverage 

The congressional debates and other available writings show that the figure resulted from two considerations. First and foremost, $2,500 was the maximum 

amount that could be placed in a deposit account held 

by a PSB. As discussed above, after 1929 the competition presented by the PSBs concerned bankers and 

Congress alike. Second, there was concern about the 

burden that deposit insurance assessments would 

place on banks as they struggled to recover from the 

financial crisis; setting the insurance coverage at 

$2,500 appeased bankers, who were naturally apprehensive about taking on any additional financial commitment.55 

Competition from Postal Savings Banks 

The federal deposit insurance program adopted in 

1933 was technically not the first protection offered 

depositors by the federal government. The Postal 

Savings System was established in the United States 

in 1910 to be a vehicle that encouraged thrift among 

small savers. Although the limit on accounts held by 

PSBs had been set originally at $500, by 1933 the maximum amount that could be held in one PSB account 

was $2,500.56 The Postal Savings System was set up 

to operate through the U.S. postal system. As a result, 

the government was effectively operating a financial 

institution. Because of this unorthodox structure, a 

nearly 40-year debate preceded establishment of the 

Postal Savings System in the United States.57 Yet, it 

was this same structure that led to the system’s dramatic growth after 1929. 

Before 1930, PSBs operated much as had been 

envisioned: on a small scale without directly competing with private financial institutions. But in the early 

1930s, the fact that the federal government backed 

accounts that were held in PSBs drew increased interest. The ability of PSBs to offer security to depositors, 

which bankers were unable to match, became a primary concern during the 1933 congressional debates. 

PSBs had become legitimate competitors of other 

financial institutions, and in the year immediately preceding adoption of federal deposit insurance, deposits 

in PSBs increased by more than 125 percent.58 Once 

Congress became aware that almost 97 percent of the 

depositors in national banks had deposits of less than 

$2,500, their concern intensified: How many of these 

depositors would soon choose to flee to PSBs?59 As 

Congress was warned, “[Depositors] are going to ask 

for a guaranty of their deposits and if they do not get 

it, they are going to go more and more to the Postal 

Savings System.”60 

PSBs had always offered security to their depositors. Perhaps this would have been enough to attract 

depositors during this unsettled period, but deposits 

held in PSBs also began to make economic sense. 

Congress had set the interest rate that could be paid 

on deposits held by PSBs at 2 percent—below that 

being paid by private financial institutions. But by the 

early 1930s, interest being paid on deposits held by 

private financial institutions had fallen, and PSBs were 

able to offer prospective depositors a competitive rate 

in addition to their government guarantee.61 

Congress had designed the structure of the Postal 

Savings System to ensure that funds deposited in 

PSBs would be kept in the local community. To that 

end, the Postal Savings Act required PSBs to deposit 

95 percent of their deposits in a local bank willing to 

provide security for the deposits and pay the PSB 2.25 

percent interest.62 When banks located within a community reached the point at which they were unwilling to provide adequate security and pay the required 

rate of interest, they refused the deposits. As a result, 

PSBs deposited the funds outside the jurisdiction in 

which they originated. Consequently, not only did the 

increase in PSB deposits mean a corresponding 

decrease in the funds held by private financial institutions, but the increase in PSB deposits further exasperated the financial chaos found in local markets by 

withdrawing money from the community itself.63 

55 Deposit insurance assessments originally were based on insured 

deposits. 

56 See note 14 above. 

57 A movement to establish a system of postal banks began in 1871. 

Congress considered ten proposals for such a system, but not until 

after the banking panic of 1907 did it finally adopt a Postal Savings 

System. A large part of the resistance to postal savings banks came 

from the banking sector, which not only protested the government’s 

involvement in what was considered to be a private-sector activity but 

also predicted that such a system would lead to a government 

takeover of the entire financial sector. O’Hara and Easley (1979), 742. 

58 77 Cong. Rec. H4058 (daily ed. May 23, 1933); see O’Connor (1938), 

86. 

59 In 1933, 96.76 percent of the depositors in national banks had deposits 

of less than $2,500. 77 Cong. Rec. H5893 (daily ed. June 13, 1933). 

60 U.S. House Committee on Banking and Currency (1932), 210 (statement of D.N. Stafford). 

61 When the Postal Savings System was being set up, one of the criticisms was that it would be in competition with private financial institutions while having an unfair advantage because of its government 

backing. To circumvent this criticism, Congress fixed the rate of 

interest PSBs could pay on deposits at 2 percent. (In 1910, when 

PSBs were established, banks were paying 3.5 percent on time 

deposits.) 

62 U.S. Postal Savings Act, ch. 214, § 9 (1910). 

63 Additional problems occurred when deposits held by PSBs were 

invested in government securities, as the Postal Savings Act required 

under certain circumstances. In such cases, money that would normally be held as cash or left on deposit with Federal Reserve Banks 

was diverted to the U.S. Treasury; this diversion resulted in distortions in the economy. O’Hara and Easley (1979), 744–45, 751–52. 

7 
FDIC Banking Review 

Although the Postal Savings System had proved 

beneficial to depositors, Congress realized that, if the 

country was to recover from the Depression, money 

had to be returned to the traditional banking system. 

“By insuring bank deposits and thereby placing them 

on a par with postal savings deposits, postal savings 

funds will find their way back into the banks.”64 

According to a memorandum written by Senator 

Vandenberg, “The protection of deposits up to $2,500 

provides comparable protection to the limits in the 

Postal Savings System. Thus it meets Postal Savings 

competition. . . . It protects bank deposits as represented by the great mass of depositors.”65 In the final 

analysis, adopting a $2,500 limitation for the new 

deposit insurance system made sense, since it provided the same protection as the Postal Savings System 

while insuring over 90 percent of the depositors.66 

Deposit Insurance Assessments 

In considering the federal deposit insurance program, Congress was aware that 20 percent of all banks 

that had been in operation at the end of 1929 had 

failed between 1930 and 1932.67 How could a deposit 

insurance program be set up so that funds would be 

sufficient to pay depositors in future bank closings, 

but the cost would be manageable for bankers who 

were trying to recover from the economic crisis? As 

was stated at the hearings on the federal insurance program: 

The cost of depositors [sic] insurance to the 

banks must not be such as to in any event 

endanger their solvency or be an unfair burden 

upon sound banks. The requirement of special 

assessments to pay depositors in times of great 

losses caused by a deluge of bank failures was 

the cause of the breakdown of the State guaranty laws. . . . The charge to the banks for this 

insurance must be so reasonable that the benefits derived from it more than compensate for 

its cost.68 

The FDIC was initially capitalized through the sale 

of nonvoting stock: The Treasury Department subscribed for $150 million, and the Federal Reserve 

Banks subscribed for approximately $139 million. 

Under the permanent plan, insured institutions would 

have been assessed 0.5 percent of total deposits. 

Additional assessments equal to 0.25 percent of total 

deposits were possible with no limit on the number of 

additional assessments that could be imposed. 

After studying the cost of insurance, Congress concluded that the cost to banks under the permanent 

plan would possibly be more than they were earning at 

that point in their economic recovery.69 As a result, 

the Banking Act prohibited banks that were members 

of the Federal Reserve System from paying interest on 

demand deposits and authorized the Federal Reserve 

Board to limit the interest rate that member banks 

could pay on time deposits.70 Congress reasoned that 

the money the banks saved through the interest-rate 

limitations would be more than enough to pay the 

deposit insurance assessment.71 

Nevertheless, during the debates on the bill, 

bankers vehemently opposed the plan: There was no 

way they could reasonably expect to turn things 

around and pay such large assessments.72 In attempting to secure the quick passage of the deposit insurance program, Senator Vandenberg addressed the 

bankers’ concerns. Under his amendment, banks 

were assessed 0.5 percent of insured (rather than total) 

deposits; 0.25 percent of the assessment was to be paid 

in cash, with the other 0.25 percent subject to call by 

the FDIC, and only one additional assessment could 

be imposed. 

Senator Vandenberg had analyzed the history of 

bank failures relative to the $2,500 insurance limitation and compared the insurance fund’s liability under 

such a scenario with its potential size under his proposal. He reasoned that the cost of deposit insurance 

under his plan would be covered by the savings that 

insured institutions would realize under the limitations that the Banking Act imposed on interest paid to 

depositors. As he illustrated, if deposits had been 

insured for a maximum of $2,500 in 1932, the net loss 

64 U.S. House Committee on Banking and Currency (1932), 241 (statement from John G. Noble letter placed in the record by Representative Steagall). 

65 77 Cong. Rec. S4240 (daily ed. May 26, 1933).
 

66 77 Cong. Rec. S5861–62, S5893 (daily ed. June 13, 1933).
 

67 Kennedy (1973), 131.
 

68 U.S. House Committee on Banking and Currency (1932), 111 (statement of Representative Ashton C. Shallenberger). 

69 Ibid., 227. 

70 Even though the provision of the Banking Act limiting the interest 

rates paid to depositors applied only to member banks, it was not 

intended that nonmember banks would receive a competitive advantage, since the Act required all insured banks to become members of 

the Federal Reserve System by July 1, 1936. (The date was later 

extended to July 1, 1937. But the Banking Act of 1935 modified the 

requirement before the effective date and as a result, only state banks 

having average deposits of $1 million or more were obligated to 

become members of the Federal Reserve System. This requirement 

was repealed on June 20, 1939, before taking effect.) 

71 77 Cong. Rec. S4168 (daily ed. May 25, 1933). The limitation on the 

rate of interest paid on deposits was also an attempt to staunch the 

flow of money from small towns into money-center banks. Moneycenter banks had been bidding up the interest paid on deposits, thereby drawing funds away from small towns. 77 Cong. Rec. S4170 (daily 

ed. May 25, 1933). 

72 See, for example, 77 Cong. Rec. S4168 (daily ed. May 25, 1933); 

Preston (1933), 599–600. 

8 
Deposit Insurance Coverage 

to the deposit insurance fund (allowing for a recovery 

on liquidation of between 55 percent and 60 percent) 

would have been less than one-half of the total 

resources that would have been available under his 

proposal.73 His goal was to show that the $2,500 limit 

on deposit insurance coverage protected a majority of 

depositors while containing the costs to bankers and 

that, as a result, “[the temporary plan] represent[ed] a 

maximum answer. . . [with] a minimum speculation in 

terms of the fiscal risk.” It was a “limited experiment” 

that “no valid objection [could] be sustained 

against.”74 

June 1934: Deposit Insurance Coverage 

Raised to $5,000 

The temporary plan was originally intended to provide insurance coverage until July 1, 1934, at which 

time the permanent plan was scheduled to become 

effective. But in April 1934, Congress held hearings 

on extending the temporary plan for one year. 

Congress reasoned that the extension would allow the 

FDIC time to gain experience in dealing with the 

deposit insurance program so that it could recommend 

any changes that should be made to the permanent 

plan before its effective date. The additional time 

would also allow those institutions that were not obligated to be covered by deposit insurance a further 

opportunity to evaluate the benefits of Federal 

Reserve System membership and federal deposit 

insurance protection.75 The FDIC supported the 

extension. Leo T. Crowley, Chairman of the FDIC, 

stated that even though the FDIC found that an 

extension “of the limited insurance provided by the 

temporary fund [was] necessary,” the agency favored 

neither an indefinite postponement of the implementation of the permanent insurance plan nor any 

changes to the permanent plan.76 

As part of the extension of the temporary plan, 

Congress raised deposit insurance coverage to 

$5,000.77 The congressional committee report stated 

that “it [was] highly important . . . that . . . further provision be made for adding to the insurance in order to 

secure still further protection. . . . In order to accomplish this further protection, the committee has provided for increasing the amount of the deposits of a 

depositor eligible for insurance . . . from $2,500 to 

$5,000.”78 Chairman Crowley testified that the FDIC 

supported the deposit insurance increase.79 According to Chairman Crowley, the FDIC thought that 

deposit insurance should cover “reasonably large 

deposits.”80 

The congressional committee was also persuaded to 

raise the limits by the resistance the insurance continued to evoke. The American Bankers Association and 

the U.S. Chamber of Commerce lobbied for an extension to the temporary plan, hoping that an extension 

would eventually lead to a repeal of the insurance law. 

The congressional committee reasoned that an 

increase in the insurance limit to $5,000 would avoid 

the possibility of the extensions being misinterpreted 

as a sign of lukewarm support for the program.81 

Although the subject of the congressional hearings 

was extending the temporary plan, testimony was also 

provided on the deposit insurance provisions contained in the permanent plan. During the hearings it 

became clear that implementation of the permanent 

plan would meet resistance. Although many bankers 

were concerned about the unlimited liability imposed 

on participating institutions under the permanent 

plan, the institutions especially concerned were mutual savings banks.82 The FDIC and the Office of the 

Comptroller of the Currency testified that they 

expected a majority of those banks voluntarily participating in the deposit insurance plan to withdraw from 

the system if and when the permanent plan became 

operational because of the unlimited liability provisions.83 

73 77 Cong. Rec. S4240 (daily ed. May 26, 1933).
 

74 Vandenberg (1933), 42 (emphasis in the original).
 

75 See note 70 above. Congress understood that the viability of the
 

deposit insurance program depended on broad participation. Fiftyfive percent of banks were voluntarily members of the temporary 

insurance fund. Congress and the FDIC were especially concerned as 

to whether the Morris Plan banks and mutual savings banks would 

choose to retain deposit insurance coverage and thus remain members 

of the Federal Reserve System. At the time of the hearings, Morris 

Plan banks and mutual savings banks held 28 percent of insured 

deposits, an amount equal to that held by state nonmember banks. In 

Congress’s view, it was inadvisable to force these institutions to make 

their choice by July 1, 1934, for fear they would choose to leave the 

system. U.S. House Committee on Banking and Currency (1934b), 2. 

(Morris Plan banks were consumer-oriented institutions that extended installment credit to consumers and accepted savings deposits or 

sold investment certificates.) 

76 U.S. House Committee on Banking and Currency (1934a), 2. The 

FDIC favored extending the temporary plan for three reasons: (1) to 

give state legislatures time to make any changes to state law that were 

necessary to allow state banks to buy stock in the FDIC, which they 

were required to do under the Banking Act; (2) to give the FDIC 

more experience with the administration and operation of the insurance plan; and (3) to allow the Reconstruction Finance Corporation 

additional time to bolster the capital structure of banks. FDIC (1934), 

32. 

77 The temporary plan was again extended by congressional resolution 

until August 31, 1935. 

78 H. Rept. 73-1724 (1934), 2. 

79 U.S. House Committee on Banking and Currency (1934a), 3. 

80 Ibid., 29. 

81 Ibid., 142. 

82 Ibid., 43. 

83 Ibid., 97, 135. 

9 
FDIC Banking Review 

1935: $5,000 Deposit Insurance
 

Coverage Adopted as Permanent 


The FDIC had a lead role in persuading Congress 

to abandon the more extensive liability that would 

have been imposed on banks and the FDIC under the 

original permanent plan. In 1935, responding to a 

request made by President Roosevelt, the FDIC formally recommended that the $5,000 limitation on 

deposit insurance coverage be permanently retained. 

The FDIC reasoned that the increased liability that 

would have accrued to the Corporation under the original permanent plan was not justified because more 

than 98 percent of depositors were protected in full 

under the $5,000 limitation. According to congressional testimony, if the permanent plan were implemented as originally proposed, the liability of the 

FDIC would have increased by $30 billion while additional coverage would have been provided for only 1 

out of every 100 depositors.84 

The FDIC also recommended that insurance premiums be regularly assessed on the total deposits held 

in an insured institution rather than on only the 

insured deposits. The FDIC reasoned that assessments based solely on insured deposits placed a heavy 

burden on small institutions.85 The Corporation also 

suggested an annual assessment rate of 1/12 of 1 percent of total average deposits, payable in two installments. After weighing the options available, the 

FDIC Chairman testified that “[w]e do not believe 

that one-twelfth of one percent will build large enough 

reserves for the Deposit Insurance Corporation for the 

future, but the earning capacity of the banks right now 

is very low. We are interested first in the banks having 

sufficient income themselves so that they may take 

their losses currently and so that they may build 

reserves.”86 The Banking Act of 1935 initiated annual assessments of 1/12 of 1 percent of total average 

deposits, which were payable in two installments.87 

1950: Increase in Deposit Insurance
 

Coverage to $10,000 


In 1950, Congress enacted the Federal Deposit 

Insurance Act, which included a provision that 

increased deposit insurance coverage from $5,000 to 

$10,000.88 Review of the testimony surrounding the 

increase reveals that the proposal for additional insurance coverage met with practically no opposition. The 

Federal Reserve Board testified that the additional 

coverage was justified on the basis of the increase in 

the wholesale price index, which had more than doubled since 1935, as well as the increase in the number 

of depositors.89 The Treasury Department favored 

increasing deposit insurance coverage, since in its view 

the FDIC could support the added expense.90 The 

FDIC went on record as recommending that the law 

be passed.91 As was testified to at the hearings on the 

increase, “[Deposit insurance coverage] should be regarded as flexible, and under the changing times and 

changing conditions which characterize the day, 

change should be made.”92 

Protection Comparable to 1934 

One of the justifications for increasing the deposit 

insurance coverage in 1950 was that a change was 

needed to keep pace with increases in the monetary 

and credit levels in the United States that had 

occurred since 1933. According to the FDIC, by 1950 

the $5,000 deposit insurance coverage provided only 

one-half of the protection that had been provided in 

1934.93 Congressional testimony confirms that the 

increase restored coverage to where it was in 1934, 

both as to the value of the dollar and the number of 

depositors covered.94 In the opinion of many, the 

increase was viewed as a “natural sequence to the 

steadily rising economy since 1935.”95 

84 79 Cong. Rec. H6922 (daily ed. May 3, 1935). 

85 FDIC (1934), 34. Chairman Crowley testified that “[i]t is recommended that assessments be based upon total deposits in insured 

banks, regardless of whether or not the insurance is limited to $5,000 

per depositor. To base assessments solely on the first $5,000 of each 

depositor’s account places an undue burden upon the small banks. 

The greatest risk to the Corporation does not necessarily lie in these 

institutions. . . . It has been demonstrated frequently in recent years 

that the consequences of the failure of a large bank may be more disastrous than the failure of a number of small institutions.” U.S. Senate 

Committee on Banking and Currency (1935), 29. 

86 U.S. House Committee on Banking and Currency (1935), 48. 

87 Although the FDIC recommended that the deposit insurance limit be 

retained at $5,000, the limitation was also viewed as a compromise 

between those who did not want any federal deposit insurance and 

those who wanted 100 percent insurance coverage with liability resting with the federal government. 79 Cong. Rec. S5575 (daily ed. May 

3, 1936). 

88 Before 1950, the law relevant to deposit insurance coverage and the 

Federal Deposit Insurance Corporation was contained within the 

Federal Reserve Act. 

89 Federal Reserve Board of Governors (1950b), February, 151–60.
 

90 U.S. Senate Committee on Banking and Currency (1950a), 55. 


91 Ibid.
 

92 U.S. House Committee on Banking and Currency (1950a), 127 (statement of Richard H. Stout, Chairman of the Legislative Committee of 

the Consumer Bankers Association). 

93 FDIC (1950), 3. 

94 U.S. Senate Committee on Banking and Currency (1950a), 70. 

95 Ibid., 89. 

10 
0

0

0

0

Deposit Insurance Coverage 

Benefits to Small Depositors 

The explanation given for the initial implementation of a federal deposit insurance program expanded 

in 1950. It had generally been recognized that the 

insurance system was intended to benefit small savers 

more than large ones. However, ensuring the continued stability of the monetary system was the motivation usually referred to as influencing passage of 

legislation enacting the program in 1933.96 Then, in 

1950 the FDIC testified before Congress that the primary purpose of the Corporation was “to protect the 

small depositor.”97 In addressing the proposed increase 

of the insurance limit to $10,000, the FDIC testified 

that the increase was needed “to protect the same percentage of depositors as was covered in 1935 under the 

$5,000 maximum.”98 

In keeping with the concern for small savers, 

Congress was also interested in protecting the funds 

held in mutual savings banks, which were known as 

“depositaries for small savers.”99 In 1934, accounts 

held in mutual savings banks could be fully protected 

by deposit insurance because they were limited under 

state law to a maximum of $5,000.100 But by 1950, 

the limitation on accounts held by mutual savings 

banks had been raised to $7,500, with an additional 

sum allowed for any interest that had accrued. As a 

result of the increase of the deposit insurance limit to 

$10,000, the number of accounts held by mutual savings banks that were fully protected rose from 93.4 

percent to 99.7 percent.101 

Benefits to Small Banks 

Another justification for the increase in deposit 

insurance coverage in 1950 was the expected benefit 

to small banks and its importance to local communities. The condition of small banks was outlined by 

the FDIC in its 1949 Annual Report.

102 The FDIC 

compared the deposits held in small banks in 1949 

with those held in 1936. In 1936, approximately 15.5 

percent of insured deposits were held in banks with 

deposits of less than $1 million. By 1949, banks of this 

size held only 2.1 percent of all insured deposits. In 

contrast, banks with deposits of more than $25 million 

held two-fifths of all insured deposits in 1936, but by 

1949 they held substantially more than one-half of all 

insured deposits. 

Even though there had been no receivership 

appointed for an insured institution since 1944,103 

depositors continued to keep their funds in smaller 

institutions only to the extent that they were covered 

by insurance. Larger deposits tended to be placed in 

large money-center banks. In 1949, 97.2 percent of 

the accounts held by banks with deposits of less than 

$1 million were fully protected by deposit insurance.104 Congress recognized that raising the deposit 

insurance limit would directly benefit these institutions. The congressional report accompanying the bill 

to increase the deposit insurance limit stated that the 

increase “should tend to benefit the smaller banks 

through encouraging the retention in such banks of 

deposits in excess of $5,000.”105 

While recognizing the benefit to small banks, it was 

acknowledged that a return of deposits to small community banks would also help meet local credit needs: 

“[The deposit insurance increase] will bring the 

money that is going into the larger centers, back into 

the small communities. . . . It will put that money in 

use in the small communities, and will reverse the 

trend . . . which showed that deposits were coming to 

the large centers and leaving the small communities.”106 The FDIC testified that the increase would 

benefit small communities on the whole, since it 

would “remove the incentive to shift deposits from 

the small community banks and . . . make available 

more funds for local credit needs.”107 

Strengthened Public Confidence 

As was seen in the review of the legislative history 

for each of the increases in deposit insurance coverage, 

events affecting the broader economy often influenced the decisions to raise the insurance limit. In 

1950, the United States was emerging from a moder96 See notes 47 and 48 above and accompanying text.
 

97 U.S. House Committee on Banking and Currency (1950a), 24.
 

98 Ibid.
 

99 Ibid., 65.
 

100 Mutual savings banks were not required to participate in the federal 

deposit insurance program. See note 75 above. 

101 Ibid. In order to understand the key role that mutual savings banks 

played during this period, it is important to understand the degree to 

which these institutions were concentrated in certain areas of the 

country. Although mutual savings banks held only 36 percent of the 

total savings and time deposits in the United States, these institutions held 74 percent of the savings and time deposits located in New 

England and New York. FDIC (1949), 49. As a result of the high 

density of mutual savings banks in New England, the increase in the 

deposit insurance limit had great importance for this area of the country. 

102 All data in this paragraph are from FDIC (1949), 64.
 

103 FDIC (1950), 277.
 

104 FDIC (1949), 66.
 

105 H. Rept. 81-2564 (1950), 6. 


106 U.S. House Committee on Banking and Currency (1950a), 46 (statement of Henry M. Arthur). 

107 Ibid., 24. 

11 
FDIC Banking Review 

ate recession that had occurred in the first half of 1949, 

and although business activity increased by 1950, it 

had not generally returned to the levels reached 

before the downturn. By the first quarter of 1950, 

unemployment had reached the highest levels since 

1941; it was 50 percent higher than the first quarter of 

1949 and nearly double that of 1948.108 Tensions 

were mounting in Korea, and the initiation of a farreaching program of national defense contributed to 

the public’s uneasiness. Congress became concerned 

that the public’s confidence in the safety of the banking system was wavering. They saw the adjustment to 

the deposit insurance limitation as a vehicle that 

would further strengthen and buttress “public confidence . . . without additional cost to the taxpayer, to 

the government, or to the banks.”109 The FDIC confirmed that public confidence needed a boost when H. 

Earl Cook, a Director of the FDIC, testified that much 

of the currency that was in circulation was being kept 

in safe-deposit boxes. The FDIC believed that the 

increase might be the incentive needed to draw the 

money out of the safe-deposit boxes and back into 

“the channels of trade.”110 

1966: Increase in Deposit Insurance
 

Coverage to $15,000 


In late 1965 and early 1966, total spending in the 

United States was increasing rapidly. Consumers’ 

demand for goods, services, and credit was outpacing 

supply, while added stress was being felt by the 

demands of the deepening Vietnam War. The convergent pressures on resources produced soaring prices 

and a dramatic increase in interest rates, as the demand 

for funds overtook the supply. Demands for credit 

spilled over into the securities markets, and as a result, 

the yields offered in these markets rose. By the time 

Congress raised the deposit insurance limit in 1966, 

depository institutions, particularly the savings and 

loan (S&L) industry, were becoming desperate.111 

Although interest-rate ceilings hampered commercial banks in their ability to compete directly with the 

securities markets, the rapid turnover of bank assets 

and the ability of banks to offer the public tailor-made 

debt instruments helped them maintain an inflow of 

funds.112 Thrifts,113 in contrast, were left little room 

to maneuver because they were dependent on shortterm liabilities to fund their long-term assets in an 

interest-rate environment that kept short-term interest rates above the return on their long-term assets. In 

addition, the thrift charter left the institutions few 

options regarding the instruments or services they 

offered. As a result, the normal flow of funds to these 

institutions evaporated as depositors shifted their 

accounts into commercial banks and the securities 

markets.114 

The statutory provision increasing the deposit 

insurance limit to $15,000 was added to the Financial 

Institutions Supervisory Act of 1966 almost as an afterthought. Although discussion of a deposit insurance 

increase was limited in 1966, extensive debate on the 

issue had taken place in 1963 when Congress considered raising the insurance limit to $25,000. At that 

time the President’s Committee on Financial 

Institutions had overwhelmingly recommended that 

the increase be approved; however, the matter was 

tabled because S&Ls did not have adequate dividendrate controls and the Federal Home Loan Bank Board 

(FHLBB) did not have flexible enforcement powers.115 But in 1966 those objections were quieted. 

Earlier in the year Congress had imposed interest-rate 

108 Federal Reserve Board of Governors (1950b), 507, 514.
 

109 U.S. House Committee on Banking and Currency (1950a), 127.
 

110 Ibid., 24.
 

111 S&Ls are depository institutions that were originally established to
 

receive deposits from their members and invest the funds in mortgages on the residences of the members. Although the Federal 

Savings and Loan Insurance Corporation (FSLIC) provided federal 

deposit insurance for S&Ls from 1934 through 1989, this article 

makes no distinction as to the source of the insurance. The level of 

deposit insurance provided by the FSLIC paralleled that provided 

by the FDIC. 

112 Interest-rate ceilings had originally been imposed on commercial 

banks after the banking crisis of the 1930s. The ceilings were 

intended to protect banks both by holding the institutions’ cost of 

funds below their return on assets and by restraining competition 

within the industry (by limiting the likelihood that banks would bid 

up their interest rates to attract depositors). Interest-rate ceilings did 

not apply to S&Ls. Consequently, savings associations were able to 

pay rates slightly higher than commercial banks. The added interest 

payment was intended to offset the extra services that a customer 

received from a bank but that savings associations were not authorized to offer. 

By 1966 banks felt additional pressure to increase earnings, since 

costs at financial institutions had been increasing dramatically as a 

result of a change in the institutions’ deposit mix: The total of time 

and savings deposits that paid interest increased 44 percent from 

December 1961 through June 1964. See speech by K. A. Randall, 

FDIC Chairman, to the ABA on February 1, 1965. In addition, 

advances in services made in response to customers’ demands, such 

as automated check clearing, greatly reduced the time lag between a 

check’s deposit and its payment, resulting in a decrease in earnings 

that had been made through the “float.” 

113 For purposes of this article, the terms savings and loan, savings association, and thrift are used interchangeably. 

114 The term disintermediation was coined in 1966 to describe the process 

of transferring funds out of savings associations. Cross intermediation 

was used to describe the process of transferring funds out of the savings associations into other types of depository institutions. 

115 The Chairman of the FDIC and the Comptroller of the Currency 

were among those on the committee who voted that deposit insurance coverage be increased to $25,000. Both the FDIC and the 

FHLBB had testified in favor of the increase. President Lyndon 

Johnson had also recommended in his 1966 Economic Report that 

the insurance limit be increased. 

12 
Deposit Insurance Coverage 

ceilings on deposits held by S&Ls,116 and the legislation containing the deposit insurance increase also 

authorized the FHLBB to take enforcement action. 

In the end Congress anticipated that the $15,000 limit 

would be short-lived, since it intended to consider a 

further increase shortly after the $15,000 ceiling was 

approved.117 

Increases Deposits to Savings Institutions 

As outlined above, S&Ls had difficulty competing 

during this period with either commercial banks or the 

securities industry in attracting depositors. The viability of the thrift industry was of concern, since S&L 

portfolios consisted of mortgage loans, the bulk of 

which had been made in earlier years at lower rates. 

Insured S&Ls experienced $770 million in net withdrawals in April 1966, compared with $99 million in 

April 1965.118 The FHLBB stated that the April 

“withdrawals from associations had been so heavy that 

the ability of the [Federal Home Loan] Banks to meet 

withdrawal drains and to supply expansion advances in 

sufficient volume to replace the usual inflow of savings 

appeared doubtful.”119 Because thrift institutions 

were the primary source of mortgage loans as well as of 

construction financing, more was at stake than the 

health of the thrift industry. In June 1966, $1.575 billion of mortgage loans were made—a decline of $2.345 

billion from June 1965.120 Congress considered the 

situation to be so serious so as to challenge the nation’s 

“long-standing public policy [of] encouraging homeownership.”121 

According to congressional testimony, previous 

increases in the deposit insurance limit had been followed by increases in deposits.122 As a result, 

Congress was advised that if the deposit insurance 

limit was raised to $15,000, an additional “several billion dollars” would be available for mortgage loans. 

The dramatic increase in funds was expected to come 

from institutional investors who had been prohibited 

from maintaining accounts in excess of the deposit 

insurance limit and from retail savers who chose to 

keep their deposits below the insured limit.123 

Economic Considerations: Advances 


in Income and Savings 


In 1963, during the debate on raising the deposit 

insurance limit to $25,000, the FDIC and the Federal 

Savings and Loan Insurance Corporation (FSLIC) had 

testified that the insurance funds could support the 

increase with no additional cost to either the taxpayer 

or the banker.124 As a result of that testimony, there 

was not much discussion in 1966 about whether the 

deposit insurance funds could handle increasing the 

insurance limit to $15,000. Instead, there was a general consensus that the economic changes that had 

occurred between 1950 and 1966 demanded an 

increase in the deposit insurance limit. Congress reasoned that the country “increase[s] account insurance 

roughly every 15 years . . . ,” which was appropriate 

since “15 years is a sufficiently long period of time to 

witness dramatic economic changes, including substantial growth.”125 Between 1950 and 1966 family 

income had doubled, the gross national product had 

more than doubled, and personal savings had 

increased dramatically.126 The House reported that 

“the great advances in the personal income and savings of the American people since the last insurance 

increase in 1950 require that account insurance be 

increased to at least $15,000.”127 

Increases Public Confidence in U.S.
 

Financial System
 

There was some sentiment in Congress that its failure to increase the deposit insurance limit in 1963 was 

“a terrible error,” and as the number of failures of 

insured institutions increased in 1964, some observers 

116 Although interest rates paid by S&Ls were controlled after 1966, it 

was made clear at the congressional hearing that S&Ls could continue to pay slightly higher rates on deposits than commercial banks. 

The need for the difference, as well as its extent and degree, were 

left to the discretion of the banking agencies. The difference 

between the rate of interest paid by commercial banks and savings 

associations became known as the “interest-rate differential.” See 

Interest Rate Control Act of 1966, Public Law 89-597, 1966 

U.S.C.C.A.N. (Statutes at Large 80 (1966): 823) 3001. 

117 H.R. Conf. Rept. 89-2232 (1966), 4 (statement of the House managers); 112 Cong. Rec. H26212 (daily ed. Oct. 12, 1966). 

118 H. Rept. 89-1777 (1966), 5–6. In 1966 the net savings inflow at S&Ls 

was 57 percent below what it had been the previous year, even 

though the net savings inflow in 1965 had already fallen by 21 percent. Federal Home Loan Bank Board (1966), 13. 

119 Ibid., 46–47. 

120 H. Rept. 89-1777 (1966), 5. 

121 Ibid., 6. 

122 112 Cong. Rec. H25003 (daily ed. Oct. 4, 1966). The experience of 

the S&L industry in 1951 after the deposit insurance ceiling was 

raised in 1950 provides some evidence that deposits increase after 

the insurance limit has been raised. In 1951, S&Ls added $2.1 billion of new savings—the largest amount that had been added in one 

year to that point. Federal Home Loan Bank Board (1951), 3. After 

the 1966 deposit insurance increase, deposits at commercial banks 

advanced in 1967 by a record $43 billion. FDIC (1967), 9. 

123 U.S. House Committee on Banking and Currency (1966c), 126. In 

addition, Congress viewed the increase in the insurance ceiling as 

another way of encouraging growth in small banks. U.S. House 

Committee on Banking and Currency (1963), 30. 

124 Ibid., 7, 21.
 

125 112 Cong. Rec. H25005 (daily ed. Oct. 4, 1966).
 

126 Ibid.
 

127 H. Rept. 89-2077 (1966), 5. 


13 
FDIC Banking Review 

discerned a corresponding loss of confidence in the 

U.S. financial system on the part of depositors.128 

Congress saw the 1966 increase in the deposit insurance limit as a way to dispel depositors’ fears as well as 

to express a “vote of confidence in the American 

financial system.”129 

Encourages Public to Save 

As discussed above, 1966 saw a sharp reduction in 

the flow of funds to depository institutions because of 

the dramatic increase in interest rates offered through 

the securities markets. The flow of funds through 

depository institutions fell from $32.9 billion in 1965 

to $20.3 billion in 1966.130 A large proportion of this 

decrease resulted from the behavior of private households: Households reduced their savings in depository institutions from $26.4 billion in 1965 to $18.9 

billion in 1966. During the same period, household 

purchases of credit-market instruments increased dramatically. The thrift industry was hit particularly hard, 

and as a result S&Ls decreased their mortgage lending 

from $8.9 billion in 1965 to $3.8 billion in 1966. 

Congress viewed the additional deposit insurance coverage as a way of encouraging members of the public 

to increase their savings; greater savings would result 

in an inflow of funds to the insured institutions.131 

1969: Increase in Deposit Insurance
 

Coverage to $20,000
 

In 1969, the U.S. economy was experiencing another credit crunch. At the time, both consumer and business spending had increased, causing intensified 

pressure on both prices and costs. When the Federal 

Reserve Board adopted a restrictive monetary policy 

to contain inflation, the strong demand for credit 

resulted in an extremely tight market. The Federal 

Reserve Bank discount rate rose to 6 percent, the 

highest level charged up to that time. Overall interest 

rates in 1969 reached the highest levels of the century.132 As money-market rates moved up sharply during 1969 and the interest rate that could be paid on 

bank deposits remained unchanged, the amount that 

was being held in large-denomination certificates of 

deposit (CDs) fell by approximately $12 billion. 

Although there was a modest gain in consumer CDs, 

total time deposits decreased by almost $10 billion. As 

a result of this outflow, banks turned to nondeposit 

sources for funds and increased their borrowings 

through federal funds and Eurodollars while also 

increasing the issuance of commercial paper by bankrelated affiliates. Through the increased use of these 

alternative sources of funding, banks were able to 

increase their loans by $25 billion. 

Savings associations experienced a net outflow of 

funds in 1969 when the excess of withdrawals over 

new deposits received amounted to $1 billion.133 

Despite this decrease, savings associations were in a 

slightly better position than they had been in 1966. In 

1969, changes in the regulatory structure of depository 

institutions made it possible for savings associations to 

compete with other depository institutions. First, 

commercial banks were restrained from the intense 

rate competition that had occurred in 1966 by special 

rate ceilings that had been placed on their time 

deposits for amounts under $100,000;134 second, savings associations were now able to offer a variety of 

savings instruments at rates above their regular passbook account rate. But as rates offered in the securities market increased and the spread between these 

rates and those offered by the savings associations 

widened, S&Ls found themselves once again unable 

to compete. 

The increase in the deposit insurance ceiling from 

$15,000 to $20,000 in 1969 was intended to aid the 

S&L industry. As congressional testimony explains, 

“The added insurance should make [savings] accounts 

much more attractive. New savings dollars [will] 

strengthen the savings industry while providing additional liquidity for housing.”135 An increase in the 

insurance limit gained additional support from the 

FDIC and the FHLBB when they reiterated their 

endorsement of raising the insurance ceiling to 

$25,000.136 And although congressional testimony 

128 112 Cong. Rec. H24984–85 (daily ed. Oct. 4, 1966). In 1964 more 

banks failed than in any year since 1942, and although there was a 

reduction in the number of banks that failed the following year, those 

that did fail in 1965 held twice the total in deposits as those that 

failed in 1964. FDIC (1965), 9. In 1966, Congress thought that the 

increase in the number of bank failures in 1964 and 1965 could have 

been avoided had the deposit insurance limit been increased in 1963. 

112 Cong. Rec. H24985 (daily ed. Oct. 4, 1966). 

129 112 Cong. Rec. H25004–05 (daily ed. Oct. 4, 1966). Congress also 

viewed the increase in the deposit insurance limit as an expression of 

its confidence in the thrift industry. 112 Cong. Rec. H25003 (daily 

ed. Oct. 4, 1966). 

130 All data in this paragraph are from Federal Home Loan Bank Board 

(1966), 5, 7. 

131 112 Cong. Rec. H25003 (daily ed. Oct. 4, 1966). See also U.S. House 

Committee on Banking and Currency (1963), 12, 15. 

132 All data in this paragraph are from FDIC (1969), 3. Interest rates 

have since risen above the level reached in 1969. 

133 Federal Home Loan Bank Board (1969), 8. 

134 At the beginning of 1966, the same maximum interest rate was 

imposed on all time deposits. Effective September 26, 1966, time 

deposits of less than $100,000 were subject to lower ceilings than 

time deposits of $100,000 or more. 

135 115 Cong. Rec. H39678 (daily ed. Dec. 17, 1969). See, for example, 

H. Rept. 91-755 (1969), 7 reprinted in 1969 U.S.C.C.A.N. 1467, 1474; 

115 Cong. Rec. H39683 (daily ed. Dec. 17, 1969). 

136 H. Rept. 91-755 (1969), 8 reprinted in 1969 U.S.C.C.A.N. 1467, 1474. 

14 
Deposit Insurance Coverage 

mentions restoring national confidence and strengthening small business as justifications for the deposit 

insurance increase, the force of the testimony confirms 

that the increase was primarily viewed as an aid to the 

thrift industry.137 

1974: Increase in Deposit Insurance
 

Coverage to $40,000
 

In 1974 the United States experienced the most 

dramatic inflationary period since the years immediately following World War II: The rate of inflation rose 

from 6.3 percent in 1973 to 11.4 percent.138 In addition, the country moved into a recession that was on 

the brink of becoming one of the deepest since World 

War II. Two developments that contributed extensively to the overall economic situation of the country 

were the oil embargo, which extended from October 

1973 to April 1974, and the termination of wage and 

price controls in April 1974.139 Wholesale prices of 

fuel, power, and related products rose approximately 

50 percent from December 1973 to December 

1974.140 At the same time, the increase in wholesale 

prices of producers’ finished goods jumped from an 

annual rate of approximately 5 percent during the second half of 1973 to 13 percent in the first quarter of 

1974, to 27 percent in the second quarter, and up to 32 

percent by the third quarter. 

The Federal Reserve Board acted to counter inflation by restricting the growth of money and credit. As 

credit demands increased, particularly in the business 

sector, interest rates rose above previous historical 

highs. As rates being paid on open-market instruments increased well above those being paid by 

S&Ls, funds were again diverted from the thrift industry into higher yielding instruments. In 1974, new 

funds that were deposited in savings associations 

declined 55.6 percent from the amount deposited in 

1973 and 80.5 percent from the amount deposited in 

1972.141 Although total assets of insured commercial 

banks increased by 9.6 percent in 1974, this was onethird less than the increase banks had experienced in 

1973.142 

It was during this period that Congress again debated raising the deposit insurance ceiling. The House 

fought for an increase to $50,000, while the Senate 

urged that a more limited increase be adopted and 

endorsed an increase to $25,000. Both the FDIC and 

the FHLBB supported increasing the insurance limit 

and testified that the added coverage would produce 

only a marginal increase in insurance risk.143 A compromise was reached while the bill was in conference 

and the deposit insurance limit was raised to 

$40,000.144 

Encouragement of Deposits 

Even though savings associations were now able to 

offer alternatives to passbook accounts that had not 

been available during the 1966 credit crunch, depositors continued to shift funds out of thrifts and into 

direct capital market investments more quickly than 

they did from commercial banks. To aggravate matters, thrifts were also hampered by a decline in mortgage loan prepayments. Mortgage prepayments, 

which are usually the most stable source of S&L 

funds, declined by 11 percent from the prepayments 

of a year earlier.145 As a result of these declines, 

closed mortgage loans held by S&Ls in 1974 were 21 

percent less than loans held in 1973.146 Since the bulk 

of the mortgage debt financing of residential property 

in the United States was held by S&Ls, any decrease 

in funds available for mortgage financing by these 

institutions was a cause for concern that transcended 

the individual institutions.147 

Congress expected that deposits would increase following an adjustment to deposit insurance coverage, 

as they had after previous increases to the deposit 

insurance ceiling.148 But in 1974, Congress also 

increased the insurance on public unit deposits from 

$20,000 to $100,000.149 The increase in insurance 

137 115 Cong. Rec. H39683 (daily ed. Dec. 17, 1969).
 

138 Federal Reserve Board of Governors (1975), January, 1–2.
 

139 On August 15, 1971, President Richard Nixon froze wages and prices
 

for 90 days. The freeze was replaced with wage and price restraints, 

which were aimed at holding price increases to no more than 2.5 percent per year. It is generally acknowledged that the wage and price 

restraints had only temporary success in moderating inflation, and 

termination of the program led to an adjustment in prices that contributed to the stepped-up rate of inflation experienced during the 

period. See Federal Reserve Board of Governors (1974), 3–5. 

140 Data in this and the next sentence are from Federal Reserve Board 

of Governors (1974), 5. 

141 Federal Home Loan Bank Board (1975), 6–7; U. S. League of Savings 

Associations (1975), 19. 

142 FDIC (1974), xi–xii. 

143 U.S. House Committee on Banking and Currency (1973), 17, 33. 

144 H.R. Conf. Rept. 93-1429 (1974), 33–34. 

145 Federal Home Loan Bank Board (1975), 9. 

146 Ibid., 11. 

147 In 1974, savings associations held approximately 48 percent of all residential mortgage loans and, at the end of 1974, mortgage loans represented 84.3 percent of the total assets held by S&Ls. U.S. League 

of Savings Associations (1975), 29, 25. 

148 See note 122 above; see also H. Rept. 93-751 (1974), 2; 120 Cong. 

Rec. H10274 (daily ed. Oct. 9, 1974). 

149 Public unit deposits are deposits made on behalf of any state, county, or municipality of the United States. 12 U.S.C. § 1813(m)(1) 

(1989). Public unit deposits had been insured to the same extent as 

other deposits before the 1974 deposit insurance increase. 

15 
159 

FDIC Banking Review 

coverage to public units not only benefited depository 

institutions by encouraging further growth in deposits; 

it also freed previously pledged assets.150 

Upon signing the deposit insurance legislation, 

President Gerald Ford stated that “the [deposit insurance] increase will help . . . financial institutions attract 

larger deposits. It will . . . encourage savers to build up 

funds for retirement or other purposes in institutions 

with which they are familiar and which are insured by 

federal agencies that have earned their confidence 

over the years.”151 

Economic Conditions Warrant an Increase 

In 1974 the United States experienced the largest 

increase in the consumer price index (CPI) since 1947, 

when the CPI rose by 11 percent.152 Between 1969 

and 1974 the wholesale price index increased more 

than 50 percent.153 In Congress’s view, inflation alone 

provided sufficient rationale for increasing the deposit 

insurance coverage in 1974.154 The FDIC agreed and 

testified that the “changes in economic conditions 

since the last increase of insurance coverage in 

December 1969 would seem to make a further 

increase appropriate at this time.”155 

As Representative Fernand St Germain stated: 

In these days when the price of living keeps 

soaring; when the price of energy has reached 

unprecedented heights; when the working man 

and woman gets his [sic] paycheck and finds 

another increase in social security tax; I think it 

is . . . about time that Congress . . . say to the 

American people: We are going to increase the 

insurance on your deposits from $20,000 to 

$50,000.156 

Restoration of Confidence in the 


Banking System
 

The year 1974 has been described as one in which 

the “confidence in the U.S. banking system [was] at 

its lowest point since the 1930s.”157 As in the Depression years, federal banking regulators publicly 

identified hoarding as a factor affecting the flow of 

money in the United States.158 The threat of a financial crisis developed during the year largely because of 

the failures of Franklin National Bank (FNB), which 

was the largest U.S. bank to have failed to that point, 

and the Bankhaus I.S. Herstatt, a private bank in West 

Germany. By the middle of June 1974, FNB had 

announced heavy losses and Herstatt had declared 

bankruptcy because of heavy foreign-exchange losses.159 Depositors’ apprehension regarding the safety 

of their funds at FNB quickly enveloped U.S. markets 

as a whole, and a flight to safety and liquidity developed.160 

Congress acknowledged that a lack of confidence in 

the U.S. financial sector had developed. The increase 

in the deposit insurance limit was viewed as a vote of 

confidence in the banking industry: Increasing the 

deposit insurance ceiling was a way “to restore the 

public’s confidence in the viability of our financial 

institutions during a time when we see an increasing 

number of banks failing.”161 In addition, Congress 

acknowledged that the increase in the insurance limit 

would encourage members of the public to increase 

their savings and thereby provide a stabilizing influence during a volatile period.162 

150 Before this increase, savings associations did not solicit deposits from 

public units, since it was necessary in most cases for the institutions 

to pledge government securities in an amount equal to the uninsured 

portion of the deposit. The FHLBB estimated that in 1974 only 

approximately 0.2 percent of the deposits held by savings associations were public funds. In 1972, commercial and mutual savings 

banks held $51 billion in public unit deposits. Approximately $49 

billion was in accounts of more than the insured limit. 120 Cong. Rec. 

H473 (daily ed. Feb. 5, 1974). 

151 Ford (1974), 497. 

152 Ford (1975), 47. 

153 U.S. Department of Commerce (1975), 418. 

154 See, for example, H. Rept. 93-751 (1974), 3. 

155 Wille (1974a). 

156 120 Cong. Rec. H473 (daily ed. Feb. 5, 1974). 

157 Sinkey (1975). 

158 Federal Reserve Board of Governors (1975), March, 123. 

159 Although the financial problems of FNB were publicized at the 

height of the public’s lack of confidence in the financial sector, concern about the viability of larger banks began in October 1973 with 

the failure of the U.S. National Bank of San Diego (USNB). USNB 

had been the largest failure in U.S. history to that point. For a discussion of the failure of USNB, see, for example, Sinkey (1974). 

Throughout the late 1960s and early 1970s, FNB had attempted to 

transform itself from a regional institution to a power in international banking. To attract business, FNB made a market in providing 

loans to poor credit risks. FNB relied heavily on purchased money 

to fund its operations, especially large CDs and federal funds, but it 

also borrowed heavily in the Eurodollar interbank market. Although 

FNB’s failure affected international markets, its relevance to the present discussion is the repercussions it had on domestic markets. 

Once FNB announced that it had lost $63.8 million in the first five 

months of 1974, holders of FNB’s liabilities rushed to withdraw their 

funds. By the end of July, FNB had lost 71 percent of its domestic 

and foreign money-market resources. For a further discussion of the 

failure of FNB, see, for example, Wolfson (1994) 49–59; Brimmer 

(1976). 

160 In addition to the problems developing in depository institutions, 

news of increasingly serious problems in the financial condition of 

New York City also made the public uneasy. New York City had 

been issuing a substantial amount of debt throughout the year. At 

one point the city accounted for almost 30 percent of the total shortterm debt that had been issued in the tax-exempt sector of the market. The city had difficulty marketing a bond issue in October 1974, 

and by December 1974 it was forced to pay the highest rate of return 

on a note issue in the city’s history. Federal Reserve Board of 

Governors (1975), March, 128. 

161 120 Cong. Rec. H10276 (daily ed. Oct. 9, 1974). 

162 S. Rept. 93-902 (1974), 2. 

16 
Deposit Insurance Coverage 

Continued Competitiveness of Financial 

Institutions 

The FDIC testified in favor of raising the deposit 

insurance limit. The Corporation viewed the increase 

as a way of putting small bankers on a more equal footing with their larger competitors. In addition, the 

FDIC considered higher insurance coverage as a 

means of helping all institutions sustain their position 

in the increasingly competitive market for savings, 

since business firms might reconsider switching their 

funds from depository institutions after weighing the 

increased protection against higher yields.163 The 

congressional report on the bill to increase the insurance limit affirms that the increased limit was viewed 

as a means for insured institutions to compete with 

nondepository institutions during periods of high 

interest rates.164 

1980: Increase in Deposit Insurance
 

Coverage to $100,000
 

The years leading up to the most recent increase in 

deposit insurance coverage were described at the time 

as the period that had the longest economic expansion 

since World War II and at the same time was plagued 

with “virulent inflation, . . . record high interest rates 

and record low savings rates.”165 The personal savings rate in the United States had fallen to the lowest 

level in almost 30 years.166 Interest-rate volatility was 

unparalleled, while the highest interest rate that could 

be earned on a traditional account at any insured 

depository institution averaged more than 2 percentage points less than the highest rate available at the 

time from nonbank intermediaries.167 The disparity 

between the amount of interest that could be earned 

at depository institutions and the amount available on 

the open market placed not only depository institutions at a competitive disadvantage but was also perceived as shortchanging small depositors.168 

The bouts of high inflation and higher interest rates 

in the 1970s increased the unpredictability of the savings flow into and out of depository institutions, particularly S&Ls. The turnover ratio (which measures 

the stability of funds) averaged nearly 48 percent during the 1970s compared with an average of 33.7 percent from 1965 through 1969. In 1979, the turnover 

ratio was almost 75 percent.169 The increased volatility of deposits held by savings associations in the 1970s 

largely contributed to the “boom or bust” nature of the 

housing industry during the decade. Mortgage loans 

closed by S&Ls in 1979 dropped by $8.7 billion from 

the previous year, but savings associations still 

accounted for 49.9 percent of all new mortgage loans 

made that year, illustrating the key role these institutions played in the nation’s housing market.170 

In 1980 Congress elected to phase out over six years 

the limitations on the maximum rates of interest and 

dividends that insured depository institutions could 

pay on deposit accounts, recognizing that while such 

constraints were in place, the institutions could not 

compete with the high-yielding instruments available 

on the open market.171 Congress’s goal in phasing out 

the interest-rate ceilings was to prevent the outflow of 

funds from depository institutions during periods of 

high interest so that an even flow of funds would be 

available for the housing market. The legislation also 

increased deposit insurance coverage from $40,000 to 

$100,000. As Congress reasoned, “An increase from 

$40,000 to $100,000 will not only meet inflationary 

needs but lend a hand in stabilizing deposit flows 

among depository institutions and noninsured intermediaries.”172 

163 U.S. Senate Committee on Banking, Housing and Urban Affairs 

(1974b), 33. The FDIC was particularly concerned about new 

financing instruments that were being used by nondepository institutions but appeared to be “deposit-like.” Citicorp had just proposed issuing a low-denomination note that would be issued by the 

bank holding company whose public identification was synonymous 

with the bank. The note carried an option to redeem before its 

potential 15-year maturity. The option was exercisable at the holder’s option. The FDIC believed that the early-redemption feature at 

the holder’s option would directly compete with traditional time 

deposits then being offered by insured institutions. Under the regulatory structure in existence, in order for a depository institution to 

offer a comparable yield, the holder would not be able to redeem the 

note for at least seven years. Wille (1974b). 

164 H. Rept. 93-751 (1974), 3.
 

165 U.S. League of Savings Associations (1980), 7.
 

166 Federal Reserve Board of Governors (1980), 613.
 

167 See U.S. League of Savings Associations (1980), 15. The rate on savings deposits at insured savings associations was used in this calculation, since savings associations paid higher rates during this period 

than commercial banks by virtue of the interest-rate differential. See 

note 116. 

168 Small depositors were frequently unable to meet the minimum 

deposit required to earn the higher rate available on the open market. 

169 U.S. League of Savings Associations (1980), 62–63.
 

170 Ibid., 66.
 

171 Depository Institutions Deregulation and Monetary Control Act of
 

1980, Public Law 96-221, Statutes at Large 94 (1980): 142 (codified 

at 12 U.S.C. § 3501). 

172 125 Cong. Rec. S3170 (daily ed. Mar. 27, 1980). 

17 
FDIC Banking Review 

Increase in Deposits to Depository
 

Institutions
 

Although the gradual elimination of interest-rate 

ceilings was intended to aid depository institutions in 

their fight against the outflow of deposits, the removal 

also placed S&Ls in a precarious position. Savings 

associations continued to be saddled with a portfolio of 

long-term mortgages paying less than market rates. 

Yet even before the six-year phase out of interest-rate 

limitations, savings associations had seen their interest 

and dividend payments soar: in 1979, savings associations paid $6.4 billion more in interest than in the preceding year; in 1979, the ratio of interest to net savings 

jumped over 24 percent from what it had been in 

1978.173 Although the S&L industry reluctantly supported the elimination of the interest-rate structure, 

the industry realized that it did not have the earnings 

capacity to remain viable without some additional 

means of attracting new deposits.174 

The provision increasing the deposit insurance 

limit was not initially included in the 1980 legislation. 

Only after concern was expressed about the ability of 

the S&L industry to survive the repeal of the interestrate ceilings did deposit insurance become an issue. 

As was the case with prior deposit insurance increases, 

Congress believed that an increase in insurance coverage would result in an influx of deposits. As the 

deposit insurance increase was being added to the 

1980 legislation, one of the proponents in the Senate 

stated that an increase “represents no additional cost 

to the insurance fund and, in the past, when the 

FSLIC insurance has been raised, it has brought more 

savings in. If there is anything we need right now . . . 

it is for people to put more money in savings institutions.”175 

A Retrospective Look at the 1980 Deposit 

Insurance Coverage Increase 

In 1989 the increase of deposit insurance to 

$100,000 was described as “almost an afterthought” 

that occurred “with little debate and no congressional 

hearings.”176 During 1990 testimony on S&L policies, Donald Regan, former Secretary of the Treasury, 

characterized the legislative session in which the 

increase was adopted as being conducted “in the dead 

of night . . . somewhere on the Hill.”177 Former 

Chairman of the FDIC William Seidman wrote that 

“it was a bipartisan effort, done at a late-night conference committee meeting, with none of the normal 

reviews by the press and the public.”178 

A review of the legislative history confirms that 

increasing deposit insurance coverage was not the primary purpose of the 1980 legislation. In addition to 

the deregulation of interest rates, the legislation 

authorized the payment of interest on negotiable order 

of withdrawal (NOW) accounts, required all depository institutions to comply with certain Federal Reserve 

Board reserve requirements for the first time, and 

involved wide-ranging changes to the nation’s monetary system. Despite the lesser degree of interest that 

may have been directed at the issue of deposit insurance, discussion on increasing the deposit insurance 

limit had occurred in October 1979: Senator William 

Proxmire, Chairman of Senate Committee on 

Banking, Housing, and Urban Affairs, stated that 

Congress had considered raising the deposit insurance 

limit to $100,000 in 1974. Senator Jake Garn agreed 

and said Congress needed to increase the insurance 

limit “early next year.”179 A bill to raise the deposit 

insurance limit from $40,000 to $100,000 was introduced on December 20, 1979.180 

When the final version of the 1980 bill was 

described on the Senate floor, Senator Proxmire made 

the following statement: 

One very important component [of the legislation] is that one which increases the federal 

deposit insurance coverage over deposits at 

insured depository institutions from $40,000 to 

$100,000 effective upon the date of enactment 

of the legislation. Federal insurance protection 

has been a bulwark of stability for depository 

institutions since its inception in the 1930’s. An 

increase from $40,000 to $100,000 will not only 

meet inflationary needs but lend a hand in stabilizing deposit flows among depository institutions and noninsured intermediaries.181 

In later discussion of the bill, Senator Proxmire stated: 

I predict if there is any piece of legislation that 

is likely to be very helpful to the banks and savings and loan institutions in keeping their head 

above water, it is this bill. 

173 U.S. League of Savings Associations (1980), 64–65.
 

174 See, for example, U.S. House Committee on Banking, Finance and
 

Urban Affairs (1980a), 212–13. 

175 125 Cong. Rec. S15278 (daily ed. Oct. 29, 1979). 

176 Pizzo, et al. (1989), 11. 

177 Secretary Regan’s testimony was based on what he had been told 

rather than on direct experience. Regan (1990), 17. 

178 Seidman (1993), 179. 

179 125 Cong. Rec. S15278 (daily ed. Oct. 29, 1979). 

180 H.R. Res. 6216, 96th Cong., 1st Sess. (1979). 

181 125 Cong. Rec. S3170 (daily ed. Mar. 27, 1980). 

18 
Deposit Insurance Coverage 

I will tell you why. We have in this bill the 

biggest increase in insurance for depositors that 

they ever had. Right now, today, FDIC insurance of State chartered bank deposits are [sic] 

insured up to $40,000. This bill brings it to 

$100,000. That makes a tremendous difference. And it should make a difference in the 

confidence people have.182 

Although in recent years the Federal Reserve Board 

has criticized the 1980 increase in the deposit insurance limit,183 a member of the Board of Governors of 

the Federal Reserve System testified at the 1980 congressional hearings and registered the Federal Reserve 

Board’s support for the increase.184 At the time of the 

Federal Reserve Board’s testimony, the legislative proposal would have increased deposit insurance coverage from $40,000 to $50,000. According to a chart that 

was given to the congressional committee summarizing the Federal Reserve Board’s views on the legislation, the Board agreed that “the proposed increase [to 

$50,000] would be in the public interest, but [the 

Federal Reserve Board was] inclined to favor an 

increase to $100,000 as [was] contained [in] H.R. 

6216.”185 

The FDIC also testified on the increase in deposit 

insurance coverage. Irving H. Sprague, Chairman of 

the FDIC, initially suggested that the insurance limit 

should be raised to $60,000 with an accompanying 

decrease in the assessment refund. Chairman Sprague 

stated that “insurance was last changed from $20,000 

to $40,000 in 1974, and if $40,000 was the right figure 

then, taking inflation into account, $60,000 would be 

the appropriate figure today. . . . If you should decide 

to increase the insurance limit, [it should be] accompanied with a modest decrease in the assessment 

refund, so that we can keep the ratio of the fund to 

insured deposits on an even keel.”186 Later in the 

same hearing Chairman Sprague did not object to 

increasing deposit insurance coverage to $100,000, 

again with a corresponding decrease in the assessment 

refund. 

The following is an excerpt from his testimony: 

Representative James Hanley: Mr. Sprague, 

I am pleased with your testimony which suggests that the insurance be raised to $60,000. I 

have suggested probably $100,000. One of the 

reasons for my $100,000 figure is by virtue of 

the cost mechanics of this. As I understand it, 

every time a change occurs with today’s overhead, it imposes a $3 million obligation of overhead; is that right? . . . 

Chairman Sprague: Yes, printing of the decals 

and signs, the mailing, the whole package runs 

approximately from one-half to three-quarters 

of $1 million in direct costs to the FDIC . . . . 

The $60,000 figure is derived by assuming that 

when Congress decreed $40,000 in 1972, they 

set the proper figure. And the inflation rate 

since then would give the equivalent of 

$60,200, something like that. 

Representative St Germain: . . . $40,000 was 

not the proper figure. The proper figure would 

have been $50,000, but we couldn’t convince 

the Senate to go along with the $50,000—it had 

to be $40,000. The proper figure was actually 

$50,000. 

Chairman Sprague: I think that the Senate is 

beginning to see some light on this subject . . . . 

My enthusiasm for increasing the figures is in 

direct proportion to your enthusiasm for doing 

something about the assessment refund; 

$50,000 is fine; $60,000 is fine. You get up to 

$100,000, if that were coupled with real change 

in the assessment rate, we wouldn’t find it objectionable. . . . 

I would suggest a minor adjustment on [the 

assessment] refund, not on the basic rate, just 

the refund, which would be a very nominal cost 

to the institution if coupled with the increase in 

insurance. I think that would be a very attractive package. . . . 

Representative Hanley: Well, your opinion 

with respect to the assessment is fair. And it 

seems to me a formula could be devised that 

would take care of that part of your problem. 

As you know, the Fed subscribes to the 

$100,000 figure. I gather, from what you say, 

you people don’t have any serious objection to 

that. Assuming that this matter related to the 

assessment, it can be adjusted. 

Chairman Sprague: The coupling is critical.187 

As a result of the 1980 legislation, the assessment 

refund was decreased from 66.66 percent to 60 percent 

of net assessment income.188 

182 125 Cong. Rec. S3243 (daily ed. Mar. 28, 1980). 

183 See Greenspan (2000); U.S. House Committee on Banking, Finance 

and Urban Affairs (1990a), 9 (statement by Alan Greenspan, 

Chairman of the Federal Reserve Board of Governors). 

184 U.S. House Committee on Banking, Finance and Urban Affairs 

(1980b), 829–42. 

185 Ibid., 836. 

186 Ibid., 782. 

187 Ibid., 864 (1980). 

188 Barth (1991), 147. 

19 
FDIC Banking Review 

Reaction to Other Changes in the Law 

An increase in the deposit insurance limit to 

$100,000 for private deposits brought the insurance 

protection for these deposits in line with that of other 

types of deposits. In 1974, when the deposit insurance 

for private deposits was raised to $40,000, deposit 

insurance coverage for time and savings accounts held 

by state and political subdivisions was increased to 

$100,000.189 Additionally, deposit insurance coverage 

for time and savings deposits of Individual Retirement 

Accounts (IRAs) and KEOGH funds was increased to 

$100,000 in 1978.190 After the 1980 increase in insurance coverage for private deposits, all deposits were 

insured to the same level. 

189 Act of October 28, 1974, Public Law 93-495, §101, Statutes at Large 

88 (1974): 1500–01; see notes 149 and 150 above and accompanying 

text. 

190 Financial Institutions Regulatory and Interest Rate Control Act of 

1978 § 1401, Public Law 95-630, Statutes at Large 92 (1978): 3641, 

3712 (codified as amended at 12 U.S.C. § 1821(a)(3)(1989)). 

CONCLUSION 

Federal deposit insurance coverage in the United 

States has never been extended to the extent envisioned under the original permanent plan enacted in 

1933. Whether the level of coverage available at any 

particular time is adequate is open to interpretation. 

Although the motives for increasing the deposit insurance coverage have varied over time, after reviewing 

the legislative history for evidence of Congress’s intent 

in raising the insurance limit, one can make several 

general observations. Just as the initial reasons for 

adopting a federal deposit insurance program were 

numerous, the reasons for each of the subsequent 

increases in coverage have been many. For the most 

part, increases in deposit insurance coverage have 

been uncontroversial, and in each case Congress has 

been influenced by developments in the broader 

economy. 

20 
Deposit Insurance Coverage 

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———. 1974. Annual Report of the FDIC for the Year Ended December 31, 1974. FDIC. 

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Ending December 31, 1966. FHLBB. 

———. 1969. 37th Annual Report: Report of the Federal Home Loan Bank Board for the Year 

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Bulletin 36, no. 2:151–60. 

———. 1950b. Federal Reserve Bulletin 36, no. 5. 

21 
FDIC Banking Review 

———. 1974. 61st Annual Report. Board of Governors of the Federal Reserve System (Board of 

Governors). 

———. 1975. Federal Reserve Bulletin 61, pt. 1, various issues. 

———. 1980. Perspectives on Personal Saving. Federal Reserve Bulletin 66, pt. 2: 613–25. 

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Services Administration. 

———. 1975. Economic Report of the President. GPO. 

Friedman, Milton, and Anna Jacobson Schwartz. 1993. A Monetary History of the United States, 

1867–1960. Princeton University Press. 

Golembe, Carter H. 1960. The Deposit Insurance Legislation of 1933: An Examination of Its 

Antecedents and Its Purposes. Political Science Quarterly 67:181–200. 

Greenspan, Alan. 2000. Testimony before the Senate Banking, Housing and Urban Affairs 

Committee and Senate Agriculture, Nutrition and Forestry Committee. Joint Hearing on 

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Harrison, George. 1932. Testimony before the Subcommittee of the Senate Committee on Banking 

and Currency, 72d Cong. 68 (1932). 

Hotchkiss, Hervey D. 1941. The Future of Federal Deposit Insurance. Bulletin of the Citadel, no. 

1:33–57. 

Kennedy, Susan Estabrook. 1973. The Banking Crisis of 1933. University Press of Kentucky. 

Marlin, J. A. 1969. Bank Deposit Insurance: I—Its Development in the USA. The Bankers’ 

Magazine. September, 115–20. 

O’Connor, J. F. T. 1938. The Banking Crisis and Recovery under the Roosevelt Administration. 

Callahan. 

O’Hara, Maureen, and David Easley. 1979. The Postal Savings System in the Depression. Journal 

of Economic History, 39, 3:741–53. 

Phillips, Ronnie J. 1995. The Chicago Plan & New Deal Banking Reform. M. E. Sharpe, Inc. 

Pizzo, Stephen, Mary Fricker, and Paul Muolo. 1989. Inside Job: The Looting of America’s Savings 

and Loans. McGraw-Hill. 

Preston, Howard H. 1933. The Banking Act of 1933. American Economic Review 23, no. 4:585–607. 

Randall, K. A. 1965. Speech to the American Bankers Association. February 1. 

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Urban Affairs. Hearings on the Savings and Loan Policies in the Late 1970’s and 1980’s. 

101st Cong., 2d sess. 

Robinson, Henry M. 1931. Testimony before the U.S. Senate Committee on Banking and 

Currency, 71st Cong., 1st sess. 

Roosevelt, Franklin D. 1934. On Our Way. John Day Company. 

22 
Deposit Insurance Coverage 

Seidman, L. William. 1993. Full Faith and Credit: The Great S&L Debacle and Other Washington 

Sagas. Times Books. 

Sinkey, Joseph F., Jr. 1974. Adverse Publicity and Bank Deposit Flows: The Cases of Franklin 

National Bank and United States National Bank of San Diego. Working Paper Series, no. 

74-17. Division of Research, FDIC. 

———. 1975. Franklin National Bank of New York: A Portfolio and Performance Analysis of Our 

Largest Bank Failure. Working Paper Series, no. 75-10. Division of Research, FDIC. 

———. U.S. Department of Commerce. 1975. Statistical Abstract of the U.S. GPO. 

U.S. House of Representatives. 	1966. Financial Institutions Supervisory Act of 1966. 89th Cong., 

2d sess. Conf. Rept. 2232. 

U.S. House Committee on Banking and Currency. 	1932. Hearings to Provide a Guaranty Fund for 

Depositors in Banks, H.R. 11362 before the Subcommittee. 72d Cong., 1st sess. 

———. 1934a. Extension of Temporary Plan for Deposit Insurance and to Amend Section 12B of 

the Federal Reserve Act So As to Extend for One Year the Temporary Plan for Deposit 

Insurance, and for Other Purposes: Hearings on S. 3025. 73d Cong., 2d sess. 

———. 1934b. Extension for 1 Year of the Temporary Plan for Deposit Insurance and Other 

Amendments to the Federal Reserve Act. 73d Cong., 2d sess. H. Rept. 1724. 

———. 1935. To Provide for the Sound, Effective, and Uninterrupted Operation of the Banking 

System, and for Other Purposes: Hearings on H.R. 5357. 74th Cong., 1st sess. 

———. 1950a. Amendments to the Federal Deposit Insurance Act: Hearings on S. 2822. 81st Cong., 

2d sess. 

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———. 1963. To Amend the Federal Deposit Insurance Act and Title IV of the National Housing Act 

(Relating to the Insurance of Savings and Loan Accounts) with Respect to the Maximum 

Amount of Insurance Which May Be Provided Thereunder: Hearings on H.R. 5130. 88th 

Cong., 1st sess. 

———. 1966a. Temporary Interest Rate Controls. 89th Cong., 2d sess. H. Rept. 1777. 

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H. Rept. 2077. 

———. 1966c. To Strengthen the Regulatory and Supervisory Authority of Federal Agencies over 

Insured Banks and Insured Savings and Loan Associations: Hearings on S. 3158. 89th 

Cong., 2d sess. 

———. 1969. Lowering Interest Rates, Fighting Inflation, Helping Small Business, and Expanding 

the Mortgage Market. 91st Cong., 1st sess. H. Rept. 755. 

———. 1973. To Provide Full Deposit Insurance for Public Units and to Increase Deposit Insurance 

from $20,000 to $50,000: Hearings on H.R. 11221 before the Subcommittee on Bank 

Supervision and Insurance. 93d Cong., 1st sess. 

———. 1974. 	Providing Full Deposit Insurance for Public Units and to Increase Deposit Insurance 

from $20,000 to $50,000. 93d Cong., 2d sess. H. Rept. 751. 

23 
FDIC Banking Review 

U.S. House Committee on Banking, Finance and Urban Affairs. 	1980a. To Amend the Federal 

Reserve Act to Authorize the Automatic Transfer of Funds, to Authorize Negotiable Order-ofWithdrawal Accounts at Depository Institutions, to Authorize Federally Chartered Savings 

and Loan Associations to Establish Remote Service Units, and to Authorize Federally Insured 

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Insurance. 96th Cong., 2d sess. 

———. 1980b. Hearings on H.R. 4986, Regulation Q and Related Measures before the Subcommittee 

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———. 1990a. Hearings on Deposit Insurance Reform. 101st Cong., 2d sess. 

———. 1990b. 	Hearings on the Savings and Loan Policies in the Late 1970’s and 1980’s. 101st 

Cong., 2d sess. 

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League. 

———. 1980. Savings and Loan Fact Book ’80. U.S. League. 

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and Federal Reserve Banking Systems, S. Res. 71. 71st Cong., 3d sess. 

———. 1932. Hearings on a Creation of a Reconstruction Finance Corporation and to Provide 

Emergency Financing Facilities for Banks and other Financial Institutions. 72d Cong., 1st 

sess. 

———. 1935. To Provide for the Sound, Effective and Uninterrupted Operation of the Banking 

Systems: Hearings on S. 1715 and H.R. 7617, Banking Act of 1935 before the Subcommittee. 

74th Cong., 1st sess. 

———. 1950a. Amendments to the Federal Deposit Insurance Act: Hearings on S. 80, S. 2094, 

S. 2307, and S. 2822 before the Subcommittee. 81st Cong., 2d sess. 

———. 1950b. Federal Deposit Insurance Act. 81st Cong., 2d sess. S. Rept. 1269. 

U.S. Senate Committee on Banking, Housing and Urban Affairs. 	1974a. Depository Institutions 

Amendments of 1974. 93d Cong., 2d sess. S. Rept. 902. 

———. 1974b. To Increase the Availability of Urgently Needed Mortgage Credit for the Financing of 

Housing and Other Purposes: Hearings on S. 2640, Title I of S. 2735, and H.R. 11221 before 

the Subcommittee of Financial Institutions. 93d Cong., 2d sess. 

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Commodity Futures Modernization Act of 2000, Derivatives Regulation. 106th Cong., 2d 

sess. 

Vandenberg, A. H. 1933. An Address in Defense of the Bank Deposit Insurance Law and an 

Answer to the American Bankers Association. In Proceedings of Thirty-Second Annual 

Convention. National Association of Supervisors of State Banks. 

Wicker, Elmus. 1996. The Banking Panics of the Great Depression. Cambridge University Press. 

24 
Deposit Insurance Coverage 

Wille, Frank. 1974a. Statement on Bills to Increase the Deposit Insurance Limit and to Provide Full 

Insurance for Public Funds before the Senate Subcommittee on Financial Institutions of the 

Committee on Banking, Housing and Urban Affairs. March 19. PR-15-74. FDIC. 

———. 1974b. Financial Institutions and the Competition for Lendable Funds. Statement 

before the Subcommittee on Financial Institutions. July 15. PR-43-74. FDIC. 

Wolfson, Martin H. 1994. Financial Crisis: Understanding the Postwar U.S. Experience. M. E. 

Sharpe, Inc. 

25 
FDIC Banking Review 

The Cost of the Savings
 

and Loan Crisis:
 

Truth and Consequences
 

by Timothy Curry and Lynn Shibut*
 

It has been more than a decade since enactment of 

the Financial Institutions Reform, Recovery, and 

Enforcement Act of 1989 (FIRREA), which began the 

taxpayers’ involvement in the cleanup of the savings 

and loan industry.1 Over time, misinformation about 

the cost of the crisis has been widespread; some published reports have placed the cost at less than $100 

billion, and others as high as $500 billion.2 Now that 

the cleanup is nearly complete, we can answer the following questions about a debacle that has consumed 

the nation for years: 

� What was the total cost of the crisis? 

� How much of the total was borne by the U.S. taxpayer? 

� How much was borne by the thrift industry? 

� How do the actual costs compare with those predicted before and during the cleanup years? 

The thrift cleanup was Congress’s response to the 

greatest collapse of U.S. financial institutions since 

the 1930s. From 1986 to 1989, the Federal Savings 

and Loan Insurance Corporation (FSLIC), the insurer 

of the thrift industry, closed or otherwise resolved 296 

institutions with total assets of $125 billion (table 1).3 

An even more traumatic period followed, with the creation of the Resolution Trust Corporation (RTC) in 

1989 and that agency’s resolution by mid-1995 of an 

additional 747 thrifts with total assets of $394 billion.4 

The combined closings by both agencies of 1,043 

institutions holding $519 billion in assets contributed 

to a massive restructuring of the number of firms in 

the industry. From January 1, 1986, through year-end 

1995, the number of federally insured thrift institutions in the United States declined from 3,234 to 

1,645, or by approximately 50 percent.5 

* Timothy Curry is a financial economist and Lynn Shibut is Chief of the 

Financial Modeling Section in the FDIC’s Division of Research and 

Statistics. The authors thank the FDIC’s James Marino, Barry 

Kolatch, George Hanc, John Thomas, and Karen Hughes for helpful 

comments, and Katie Wehner and Sandy Hinegardner for research 

assistance. Matthew Green of the Treasury Department contributed 

useful suggestions. 

1 Although the roots of the savings and loan crisis lay in the late 1970s, 

the passage of FIRREA in 1989 marked the first time taxpayer funds 

were used to resolve the crisis. That use of taxpayer funds to meet the 

guarantee to insured depositors is the reason the term cleanup is used 

rather than bailout. 

2 For example, see White (1991), 197. Also, Thomas (2000), 13. 

3 The word thrifts refers to savings associations insured by the FSLIC 

until August 8, 1989, and after that date by the Savings Association 

Insurance Fund (SAIF), administered by the FDIC. 

4 The $394 billion figure measures total assets as reported in the Thrift 

Financial Report that was most recent at the time of each thrift’s failure. This figure is net of valuation allowances on the books of the 

institution at the time of failure. Other published numbers have 

reported the total assets for the 747 thrifts at takeover to be $402.4 billion. This reported number is gross of valuation allowances. Unless 

otherwise noted, the source for all data is the FDIC. 

5 The total number of thrift institutions represents those that were 

FSLIC-insured at year-end 1986 and SAIF-insured at year-end 1995. 

It should be noted that not all of the thrift industry consolidation 

occurred because of the thrift crisis. Even without such a crisis, some 

consolidation of the industry would probably have occurred. 

26 
0

The Cost of the Savings and Loan Crisis 

Table 1
 

Thrift Failures, 1986–1995
 

($Millions) 

FSLIC RTC 

Year Number Assets Number Assets 

1986 

1987 

1988 

1989 

1990 

1991 

1992 

1993 

1994 

54 

48 

185 

9 

$ 16,264 

11,270 

96,760 

725 318 

213 

144 

59 

9 

2 

$134,520 

129,662 

78,899 

44,197 

6,148 

137 

1995 2 435 

Total 296 $125,019 747 $393,998 

Source: FDIC.
 

Note: Data are for the period January 1, 1986, to December 31, 1995.
 

Although the roots of the thrift crisis stretch back to 

the late 1970s, the financial losses experienced by taxpayers and the industry are tabulated as beginning on 

January 1, 1986, and ending at year-end 1995. The 

year 1986 was selected as the starting point because 

this was the first year when the FSLIC was reported 

insolvent. Before then, the thrift insurance fund had 

been able to cover losses from thrift failures. 

Recognition of the FSLIC’s insolvency as of year-end 

1986 marked a watershed: at that time many observers 

realized that taxpayer involvement in the resolution of 

the crisis was a strong possibility. 

The next section of this article provides background material on the crisis. It is followed first by a 

retrospective on the changing estimates of the size of 

the thrift problem over time and then by a three-part 

section identifying and analyzing the cost of meeting 

the deposit insurance obligations that remained in the 

wake of the debacle. The costs are broken into the 

FSLIC and RTC segments, as well as the taxpayer 

and the thrift industry shares of each, and the total is 

then analyzed. A brief summary concludes. An 

appendix discusses the “goodwill” litigation associated with FIRREA. 

Background 

The causes and severity of the thrift crisis have 

been documented by scholars for more than a decade.6

Several reasons cited for the collapse include: 

� high and volatile interest rates during the late 

1970s and early 1980s, which exposed thrifts to 

interest-rate risk (caused by a mismatch in duration and by interest-rate sensitivity of assets and 

liabilities); 

� the phase-out and eventual elimination in the 

early 1980s of the Federal Reserve’s Regulation 

Q, which caused increasing costs of thrift liabilities relative to many fixed-rate assets and 

adversely affected industry profitability and capital; 

� adverse regional economic conditions; 

� state and federal deregulation of depository institutions, which allowed thrifts to enter new but 

riskier loan markets; 

� the deregulation of the thrift industry without an 

accompanying increase in examination resources 

(for some years examiner resources actually 

declined); 

� reduced regulatory capital requirements, which 

allowed thrifts to use alternative accounting procedures to increase reported capital levels; 

� excessive chartering of new thrifts during the 

1980s; 

� the withdrawal in 1986 of federal tax laws (enacted in 1981) that benefited commercial real-estate 

investments; 

� the development during the 1980s of the brokered deposit market; and 

� delays in funding the thrift insurance fund during 

the 1980s and the RTC during the 1990s, which 

led to regulators’ failure to close many insolvent 

institutions in a timely manner. 

As a consequence of all these factors, during the 

1980s the thrift industry realized unprecedented losses on loans and investments. The result, as noted, was 

the failure of hundreds of thrift institutions and the 

insolvency by year-end 1986 of the FSLIC, the federal insurer for the thrift industry. As of year-end 1986, 

441 thrifts with $113 billion in assets were book insolvent, and another 533 thrifts, with $453 billion in 

assets, had tangible capital of no more than 2 percent 

of total assets. These 974 thrifts held 47 percent of 

industry assets. In response, Congress created the 

Financing Corporation (FICO) in 1987 to provide 

funding to the FSLIC by issuing long-term bonds. By 

the time FIRREA was passed two years later, FICO 

had contributed $8.2 billion in financing to the 

6 See Barth et al. (1985); Kane (1989); Barth (1991); White (1991); Barth 

and Brumbaugh (1992); Bennett and Loucks (1996); and FDIC 

(1997). 

27 
FDIC Banking Review 

Table 2
 

Chronology of Thrift Crisis Events
 

December 31, 1986 FSLIC insolvent 

August 10, 1987 FICO created to fund FSLIC 

August 9, 1989 Enactment of FIRREA 

– FSLIC abolished 

– FRF created (succeeds to FSLIC’s assets, liabilities, and operations) 

– SAIF created to handle thrift failures starting August 9, 1992 

– RTC created to resolve thrifts placed into conservatorships or receiverships between 

January 1, 1989 and August 8, 1992a (RTC to cease operations December 31, 1996)b 

– REFCORP created to fund RTC 

Note: FSLIC = Federal Savings and Loan Insurance Corporation 

FICO = Financing Corporation 

FRF = FSLIC Resolution Fund 

SAIF = Savings Association Insurance Fund 

RTC = Resolution Trust Corporation 

REFCORP = Resolution Funding Corporation 

aCutoff date for takeovers later extended to June 30, 1995. 

bDate to cease operations later changed to December 31, 1995. 

FSLIC, an amount insufficient to deal with the industry’s massive problems.7 

In response to the deepening crisis, Congress enacted FIRREA on August 9, 1989, beginning the taxpayers’ involvement in the resolution of the problem. 

(See table 2 for a listing of thrift crisis events.) FIRREA abolished the FSLIC and transferred its assets, 

liabilities, and operations to the newly created FSLIC 

Resolution Fund (FRF), to be administered by the 

FDIC. In addition, FIRREA created—to be administered by the FDIC—a new thrift insurance fund 

named the Savings Association Insurance Fund 

(SAIF), which would handle thrift failures starting 

three years from the date of FIRREA. FIRREA also 

created the RTC to resolve virtually all troubled thrifts 

placed into conservatorships or receiverships between 

January 1, 1989, and August 8, 1992. Because of the 

continuing thrift crisis, however, the RTC’s authorization to take over insolvent institutions was twice 

extended, the second time to June 30, 1995.8 The 

RTC was required to cease its operations on 

December 31, 1995, and transfer any remaining assets 

and liabilities to the FSLIC Resolution Fund.9 

FIRREA provided the RTC with $50 billion to 

resolve failed institutions. Approximately $30 billion 

of this amount originated through the establishment of 

the Resolution Funding Corporation (REFCORP), 

which was a private-public partnership created to issue 

long-term bonds to the public.10 The remaining $20 

billion came from the U.S. Treasury ($18.8 billion) and 

the Federal Home Loan Banks ($1.2 billion). Because 

the $50 billion in initial funding was insufficient to 

deal with the scope of the problem, Congress enacted 

subsequent legislation three times, raising total authorized RTC funding for losses to $105 billion between 

1989 and 1995. Some of this amount was never used. 

(See table 3.) 

7 FICO was created by the Competitive Equality Banking Act of 1987 

(CEBA) as the vehicle for recapitalizing the insolvent FSLIC. The 

law authorized FICO to raise funds for the FSLIC by selling bonds to 

the public; as noted, FICO had $8.2 billion of outstanding debt as of 

the passage of FIRREA in August 1989. Initially the thrift industry 

was to be responsible for payment of interest and principal on the outstanding debt. Later FIRREA permitted the FICO bonds to be paid 

for by annual assessments from the newly created SAIF insurance 

fund. Because of concern over the low reserves of the SAIF, the 

Deposit Insurance Funds Act of 1996 (PL 104-208) provided for the 

SAIF’s capitalization. As part of the capitalization effort, future interest payments on the FICO bonds were to be paid for by all FDICinsured institutions. 

8 FIRREA’s original period for the takeover of insolvent institutions was 

three years, which ended August 8, 1992. The RTC Refinancing, 

Restructuring and Improvement Act of 1991 extended the period to 

October 1, 1993. The RTC Completion Act of 1993 extended it 

through June 30, 1995. 

9 The original RTC termination date, established by FIRREA in 

August 1989, was December 31, 1996. The RTC Completion Act of 

1993 changed the closure date to December 31, 1995. 

10 The 1989 legislation created a quasi-private corporation to provide 

funds for the RTC. The organization and structure of REFCORP 

were patterned after FICO, established in 1987 to raise funds for the 

insolvent FSLIC. REFCORP was authorized to issue debt obligations in an aggregate amount of $30 billion starting in fiscal years 1990 

and 1991. The $30 billion in principal on the REFCORP bonds was 

paid from the sale of non-interest-bearing U.S. Treasury obligations, 

which REFCORP purchased in amounts approximately equal to the 

principal of the REFCORP obligations. These zero-coupon securities 

were funded from the reserves and special assessments of the FHLBs 

and the SAIF. Funds for the payment of interest on REFCORP obligations came from several sources, including $300 million per year from 

FHLB contributions and from the U.S. Treasury. REFCORP raised 

the $30 billion in offerings by January 1991. 

28 
0

The Cost of the Savings and Loan Crisis 

Table 3
 

RTC Funding Legislation 


($Billions) 

Loss Date of 

Legislation Funds Enactment 

FIRREA, 1989 $ 50.1 August 9, 1989 

RTC Funding Act of 1991 30.0 March 23, 1991 

RTC Refinancing, Restructuring and 

Improvement Act of 1991 6.7 December 12, 1991 

RTC Completion Act of 1993 18.3 December 17, 1993 

Total Funds Appropriated $105.1 

Total Funds Provided to RTC $ 91.3 

History of Cost Estimates 

Before, during, and even after the RTC’s lifetime, 

estimates of the costs of the crisis created widespread 

confusion. Federal agencies, politicians, thrift industry experts, and others put forth myriad estimates on 

what was called the size of the problem. These forecasts often diverged widely and changed frequently in 

response to surging industry losses. For example, 

most loss projections for RTC resolutions during the 

year leading up to passage of FIRREA in 1989 were in 

the range of $30 billion to $50 billion, but some 

reached as high as $100 billion at that time.11 Over 

the next few years, as a greater-than-expected number 

of thrifts failed and the resolution costs per failure 

soared, loss projections escalated. Reflecting the 

increased number of failures and costs per failure, the 

official Treasury and RTC projections of the cost of 

the RTC resolutions rose from $50 billion in August 

1989 to a range of $100 billion to $160 billion at the 

height of the crisis peak in June 1991, a range two to 

three times as high as the original $50 billion.12 The 

fact that the estimates were moving targets increased 

the public’s confusion and compounded Congress’s 

difficulty in reaching a consensus on funding levels for 

the cleanup. 

What accounted for the disparity and volatility 

among these projections? First, timely information on 

the condition of the failed institutions was lacking, 

especially during the early years. Analysts were forced 

to base their loss predictions on Thrift Financial 

Report data that were often outdated and unreliable 

(because thrift examinations had been infrequent and 

relaxed accounting standards were used at the time). 

In reality, the industry was in much worse shape than 

most observers had anticipated, and once the cleanup 

got under way and the industry came under intense 

scrutiny, this became apparent. During the asset 

reviews of insolvent and undercapitalized institutions, 

it became obvious that the embedded losses were 

much greater than thrift financial statements had 

reported. 

Another factor was uncertainty about the expected 

number of future failures. This number was hard to 

predict because the economy was changing, as were 

interest rates and commercial real-estate markets. 

The Bush administration, for example, originally estimated that more than 400 thrifts with over $200 billion 

in assets would be turned over to the RTC at a cost of 

approximately $50 billion, but in less than a year the 

administration’s estimate had grown to 700 or 800 

thrifts with assets of over $400 billion. The dramatic 

misreading of the number of failures and subsequent 

costs of the crisis, especially during the early years, was 

acknowledged by L. William Seidman, Chairman of 

both the FDIC and RTC during this era, in his memoir. “Only three months after the cleanup started,” he 

said, “it was already evident that the problem was far 

worse than anyone in government had envisioned, 

including me, and it was getting worse every day. The 

economy was beginning to slide into recession. Real 

estate was in real depression in some parts of the country, particularly in Texas, where the savings and loan 

problem was the largest . . . we would also need billions more to pay off depositors and carry weak assets 

of the institutions until they were sold and we could 

11 The $30 billion to $50 billion estimates formed the basis for the Bush 

administration plan in February 1989 to provide $50 billion in funding 

for the cleanup. Experts outside the federal government at that time 

claimed that the costs could be substantially higher—possibly reaching $100 billion. 

12 During the final year of the cleanup, the Treasury lowered its official 

estimates to $120 billion. 

29 
FDIC Banking Review 

recover the funds we had invested . . . we were faced 

with taking the most politically unacceptable action of 

all, having to admit that we made a big mistake.”13 

A third factor contributing to the disparate and 

volatile nature of the projections was that some public 

reports on the size of the problem looked at “apples” 

and others at “oranges,” and the two groups were not 

comparable. For example, some estimates included 

only the expected losses from RTC failures but did 

not incorporate past FSLIC costs. Other estimates 

included both the FSLIC and RTC losses but focused 

only on the taxpayers’ losses, while excluding losses 

incurred by the thrift industry over the same period. 

One of the most important factors in explaining the 

variance among the loss estimates was methodological: 

the total estimated cost sometimes did and sometimes 

did not include, in addition to the estimated losses, the 

borrowing costs for the billions of dollars of debt issues 

floated to fund the cleanup. During the FSLIC and 

RTC eras, the industry contributed $38.3 billion 

(sometimes in partnership with the Treasury) in funding for the cleanup. Special government-established 

financing entities (FICO and REFCORP) raised 

these funds by selling long-term bonds in the capital 

markets. The Treasury contributed another $99 billion,14 some or all of which was also borrowed because 

the federal government was experiencing large budget 

deficits during the period. When some analysts tabulated the costs of the cleanup, they included not only 

the principal borrowed but also interest costs for periods of up to 30 to 40 years on some or all of the borrowings. Including the financing costs in addition to 

principal could easily double or triple the estimates of 

the final cost of the cleanup. 

However, in our view, including financing costs 

when tallying the costs of the thrift crisis is methodologically incorrect. It is invalid because, in presentvalue terms, the amount borrowed is equal to the sum 

of the interest charges plus debt repayment. Adding 

the sum of interest payments to the amount borrowed 

would overstate the true economic cost of resolving 

the crisis. An example will illustrate the point. 

Assume an individual pays $100,000 for the purchase 

of a residential property and finances the whole 

amount with a 30-year loan at 10 percent interest. 

Over the 30 years of the loan the individual pays more 

than $300,000 in total costs, comprising interest and 

principal. Yet, the cost of the home is still $100,000, 

because the present value of the total costs of $300,000 

for 30 years of payments discounted by the interest 

rate of 10 percent is approximately $100,000.1�

Another example: the federal government does not 

include interest charges when costing specific programs, such as weapons systems or school lunches. 

Accounting for the Thrift
 

Cleanup Costs
 

The costs of the thrift crisis are analyzed below in 

three sections. The first section looks at costs borne 

by the FSLIC for thrifts that failed from year-end 1985 

through August 8, 1989.16 Funds were provided to the 

FSLIC, and when the FSLIC was abolished in 1989, 

the FRF became responsible for paying off notes and 

other obligations the FSLIC had left behind.17 

The second section analyzes costs associated with 

the RTC resolutions of institutions that failed after 

January 1, 1989 (excluding failures resolved by the 

FSLIC). These institutions consist of two groups of 

failed thrifts: (1) those that were nationalized and 

placed into FDIC-supervised conservatorships from 

January 1, 1989, through the passage of FIRREA on 

August 9, 1989,18 and (2) those that failed after August 

8, 1989. In the first group—institutions taken over 

before August 9, 1989—there were 262 failed thrifts 

from 33 states, with $104 billion in total assets. In the 

second group—institutions that failed after August 8, 

1989, and before June 30, 1995—there were 485 thrifts 

with total assets of $290 billion. The third section analyzes total estimated resolution costs. 

Table 4 breaks out the thrift crisis losses for both 

FSLIC- and RTC-related resolutions by source— 

either the private or the public sector—as of year-end 

1999. 

13 Seidman (1993), 208. 

14 Includes $43.5 billion to the FRF and $55.9 billion to the RTC. See 

table 4. An additional $4.2 billion was provided to the RTC and later 

returned to the Treasury. 

15 Actually, the total amount paid out over 30 years would be $315,925. 

16 As mentioned above, the tabulation of costs begins in 1986 because 

that was the year when the FSLIC became insolvent. Its equity was 

depleted from a positive balance of $4.6 billion on January 1, 1986, to 

a negative balance of $6.3 billion on December 31, 1986. 

17 FIRREA transferred all of the FSLIC’s assets, liabilities, and operations to the newly created FRF to be administered by the FDIC. 

The funds needed to settle the FSLIC’s remaining liabilities were 

provided by appropriations from the Treasury, industry assessments, 

and recoveries from asset sales. 

18 Although the failed thrifts were placed into FSLIC conservatorships, 

an agreement among the FDIC, the FHLBB, and the FSLIC gave 

the FDIC authority to supervise these conservatorships. In August 

1989 at the RTC’s inception, the conservatorships were turned over to 

the RTC for management and ultimate resolution. 

30 
The Cost of the Savings and Loan Crisis 

Table 4
 

Estimated Savings and Loan Resolution Cost, 1986–1995
 

($Billions) 

Private Public 

Sector Sector Total 

Direct Cost 

FSLIC/FSLIC Resolution Fund, 1986–95 

FSLIC year-end equity and reserves, 1985 $6.1 $6.1 

FSLIC insurance premiums, 1986–89 5.8 5.8 

SAIF assessments diverted to FRF, 1989–92 2.0 2.0 

FICO bond proceeds, 1987–89 8.2 8.2 

FRF appropriations, 1989–95 $43.5 43.5 

Less: FRF equity at 12/31/99a (2.5) (2.5) 

Estimated Direct FSLIC/FRF Cost $22.0 $41.0 $63.0 

RTC, 1989–95 

Raised through REFCORP bond proceeds:b 

FHLB payments to defease REFCORP debt, 1989–91 1.3 1.3 

SAIF assessments paid to defease REFCORP debt, 1990 1.1 1.1 

Net present value of FHLB-paid interest on REFCORP bondsc 3.5 3.5 

Net present value of REFCORP interest paid by U.S. Treasuryd 24.2 24.2 

Total REFCORP bond proceeds 5.9 24.2 30.1 

Appropriations from U.S. Treasurye 55.9 55.9 

Initial contribution from FHLB system 1.2 1.2 

Less: RTC equity at 12/31/99a (4.5) (4.5) 

Estimated Direct RTC Cost 7.1 75.6 82.7 

Estimated Total Direct Cost $29.1 $116.5 $145.7 

Indirect Cost 

Estimated cost of tax benefits to acquirers from FSLIC assistance 6.3 6.3 

Increased interest expense from higher interest rates on 

REFCORP bonds compared with U.S. Treasury borrowingsf 1.0 1.0 

Estimated Indirect Cost 7.3 7.3 

Estimated Total Cost $29.1 $123.8 $152.9 

Memo: goodwill litigation cost through 12/31/99g 0.4 0.4 

Note: For these costs to be comparable to those of other government programs, they exclude interest on the national debt incurred to 

fund the cleanup, and, in the case of FICO and REFCORP, interest that would have accrued to the national debt had such funding come 

from the general fund of the U.S. Treasury instead of from FICO and REFCORP. Resolution costs start with 1986 because the FSLIC 

became insolvent that year. 

aAdjusted for expenses associated with goodwill litigation. See note g below. 

bREFCORP bonds were funded via a public-private partnership. Total funds raised by REFCORP were $30.1 billion. Because of the 

mix of private and public funding, discounting is used to allocate the $30.1 billion on the basis of the contributions made by various parties at different times. 

cNet present value of the FHLBs’ $300 million annual contribution to cover part of REFCORP interest expense. 

dCalculated as the total REFCORP contribution ($30.1 billion) minus the net present value of the private-sector contributions. 

eTotal appropriations were $60 billion, but $4.2 billion was returned to the Treasury in 1999. 

fPresent value of higher interest expense of REFCORP borrowing compared with comparable-term U.S. Treasury securities. This is 

treated as a public-sector expense because the U.S. Treasury is responsible for all interest expenses above those paid by the FHLBs. 

gThe FDIC cost of litigation stemming from changes in accounting treatment of supervisory goodwill and other items in FIRREA 

through 12/31/99. The cost borne by the Department of Justice and estimated future costs are unavailable. Awards that have not been 

paid are excluded. In this presentation, goodwill expenses and recoveries are excluded from the cost of the Savings and Loan resolutions. Goodwill expenses and recoveries relate to legislative changes in FIRREA, not to the resolution of failed thrifts. Thus, this is 

reported only as a memo item. 

31 
FDIC Banking Review 

FSLIC Estimated Resolution Costs 

For FSLIC failures, the loss from the beginning of 

1986 forward was $63.0 billion, of which the public 

sector accounted for $41.0 billion, or 65 percent, while 

the thrift industry paid $22.0 billion, or 35 percent of 

the total. All the FRF-related public-sector losses 

were accounted for by the Treasury’s $43.5 billion contribution. As of year-end 1999, however, the FRF still 

retained $2.5 billion in equity that was expected to be 

returned to the taxpayers, so the net loss was $41.0 billion.19 (As mentioned above, the FRF was responsible for settling accounts on all outstanding FSLIC 

assistance agreements and receiverships.) The $22.0 

billion in thrift industry funding for FSLIC losses 

included: $8.2 billion that came from the thrift industry through the sale of long-term FICO bonds; FSLIC 

insurance premiums from 1986 forward and SAIF 

assessments diverted to the FRF, accounting for an 

additional $7.8 billion in spending; and $6.1 billion 

from the original FSLIC insurance fund equity and 

reserves as of year-end 1985.20 

RTC Estimated Resolution Costs 

As of December 31, 1999, the RTC losses for 

resolving the 747 failed thrifts taken over between 

January 1, 1989, and June 30, 1995, amounted to an 

estimated $82.7 billion, of which the public sector 

accounted for $75.6 billion, or 91 percent, and the private sector accounted for $7.1 billion, or 9 percent 

(table 4). 

The largest component of the public-sector loss was 

direct Treasury appropriations of $55.9 billion;21 the 

Treasury also absorbed $24.2 billion of the $30.1 billion in REFCORP contributions received from 1989 

to 1991. However, the public-sector losses were 

reduced by $4.5 billion in equity held by the RTC as 

of year-end 1999.22 

This accumulation of equity over the years was 

attributable to a number of factors. When an insured 

depository institution was closed and put into a 

receivership, the RTC placed a loss adjustment factor 

against the book value of the assets (this value was 

based on appraisals or other market information available at the time). These loss reserves reduced the 

value of the assets to the expected market or recovery 

value. In its reserving procedures, the RTC (with the 

approval of the GAO) took a conservative approach so 

as not to overstate the value of the assets acquired 

from failed institutions. In applying reserving procedures, the RTC considered a variety of factors including the fair market value of assets when residential and 

commercial markets were collapsing and the costs 

associated with particular sales methods developed by 

the RTC. For example, claims from both representation and warranty guarantees on asset sales and securitizations of nonstandard assets had to be anticipated 

and loss reserves established. During the 1990s, as the 

economy improved and real-estate markets recovered, 

the losses on asset sales and claims from representation and warranty and asset-securitization guarantees 

were less than anticipated. Thus, a portion of previously set-aside reserves were recaptured into the RTC 

equity account and offset the overall costs of the 

cleanup. 

The thrift industry losses included the initial $1.2 

billion contributed by the Federal Home Loan Banks 

(FHLBs) to capitalize the REFCORP. The FHLBs 

also paid $1.3 billion, and the SAIF paid $1.1 billion, 

to purchase zero-coupon securities worth $30 billion at 

maturity—to be used to pay the principal of REFCORP debt. The FHLBs incurred an additional $3.5 

billion loss that represented the present value of the 

FHLBs’ portion of the interest payments on REFCORP bonds. 

Total Estimated Resolution Costs 

As of December 31, 1999, total direct costs attributable to the closing of insolvent thrift institutions over 

the 1986–1995 period amounted to $145.7 billion. 

Indirect costs due to the loss of Treasury revenue 

because of the tax benefits that accrued to acquirers of 

failed institutions under past FSLIC resolutions 

amounted to $6.3 billion.23 An additional $1.0 billion 

of indirect costs was incurred because interest expens19 The FRF equity will be returned to the Treasury as the remaining 

workload is completed. This figure is adjusted for goodwill litigation 

costs. 20 These reserves were premiums paid before 1986 that were spent during the crisis. 

21 Appropriations were $60 billion, but approximately $4.2 billion was 

returned to the Treasury in 1999. 

22 These funds will be returned to the Treasury, or will be used to reduce 

the Treasury’s interest payments on the REFCORP bonds, as the 

remaining workload is completed. This figure is adjusted for goodwill 

litigation costs. 

23 During most of the 1980s, special tax benefits accrued to those acquiring insolvent thrift institutions. For example, assistance paid to acquiring institutions was nontaxable. In addition, in some cases acquiring 

organizations could carry over certain losses and tax attributes of the 

troubled institutions to reduce their overall tax liability. These provisions reduced the amount that the FSLIC was required to pay acquiring organizations to take over insolvent institutions. As a consequence 

of these tax benefits, revenue was lost to the Treasury. Thus, these tax 

benefits are referred to as “indirect costs.” No such benefits were 

granted after 1988. 

32 
The Cost of the Savings and Loan Crisis 

es were higher with the use of REFCORP bonds than 

with Treasury financing.24 Thus, the combined total 

for all direct and indirect losses of FSLIC and RTC 

resolutions was an estimated $152.9 billion. Of this 

amount, U.S. taxpayer losses amounted to $123.8 billion, or 81 percent of the total costs. The thrift industry losses amounted to $29.1 billion, or 19 percent of 

the total. 

The accumulated losses of $152.9 billion were higher than the official and private forecasts of the late 

1980s but lower than those made by the government 

and others during the early to mid-1990s. As mentioned above, during the late 1980s the full extent of 

the problem was unknown until the cleanup began; 

thus, many early forecasts underestimated the size of 

the problem. In the early to mid-1990s, lower interest 

rates and an improving economy reduced the number 

of thrift failures and improved prices for thrift franchises and assets held by thrifts; thus, the final losses 

were less than those predicted at the height of the crisis. In addition, because perceptions of thrift assets 

during the crisis years had been unfavorable, the RTC 

adopted conservative accounting procedures, and the 

combination of these policies and a strong economy 

caused the costs of the cleanup to decline every year 

after 1991. 

As of year-end 1999, the savings and loan cleanup 

was largely complete. The FSLIC Resolution Fund, 

which controls all remaining assets and liabilities of 

both the FSLIC and the RTC, either held or had a 

direct claim on approximately $7 billion in assets, most 

of which were cash and low-risk securities.25 Thus, 

losses from future asset sales will not materially 

change the loss figures. However, the costs of the 

goodwill litigation associated with FIRREA (see the 

Appendix) are still largely unknown, and it could be 

several more years before these cases are concluded. 

Summary 

The savings and loan crisis of the 1980s and early 

1990s produced the greatest collapse of U.S. financial 

institutions since the Great Depression. Over the 

1986–1995 period, 1,043 thrifts with total assets of over 

$500 billion failed. The large number of failures overwhelmed the resources of the FSLIC, so U.S. taxpayers were required to back up the commitment 

extended to insured depositors of the failed institutions. As of December 31, 1999, the thrift crisis had 

cost taxpayers approximately $124 billion and the 

thrift industry another $29 billion, for an estimated 

total loss of approximately $153 billion. The losses 

were higher than those predicted in the late 1980s, 

when the RTC was established, but below those forecasted during the early to mid-1990s, at the height of 

the crisis. 

24 The REFCORP funding mechanism essentially required that the 

U.S. Treasury pay interest at slightly higher rates than it did for 

Treasury bonds of similar maturity. Although some might argue that 

this requirement relates to funding more than to resolution costs, this 

funding mechanism was considered necessary for Congress to enact 

the enabling legislation. Further delays in funding would have 

increased total resolution costs. 

25 Included are $2.9 billion in cash held directly by the FRF, as well as 

the FRF’s claim on $1.5 billion in cash and low-risk securities held by 

receiverships for which the FRF is the primary creditor. 

33 
FDIC Banking Review 

APPENDIX: GOODWILL LITIGATION
 

On July 1, 1996, the U.S. Supreme Court ruled that, with the 1989 passage of FIRREA, the federal government had violated contractual obligations.26 FIRREA mandated new regulatory capital accounting for depository institutions and provided for the elimination or rapid phase-out of 

the use of “supervisory goodwill” in calculating the regulatory capital of financial institutions. 

As a result of the Court’s ruling, numerous thrifts that had been involved in mergers and acquisitions during the 1980s and had “supervisory goodwill” on their books became undercapitalized. Many of these thrifts were closed by supervisors, while others altered their business 

strategies (for example, by shrinking their asset base) to meet the new capital standards. 

In response, as of July 31, 2000, 141 thrift acquirers had filed suit in District Court or the U.S. 

Court of Federal Claims, seeking compensation from the federal government for losses (table 

A.1). As of July 31, 2000, two judgments totaling $40 million had been paid for cases filed in 

District Court. All other cases were consolidated to the U.S. Court of Federal Claims, where 103 

cases were still pending trial. At the U.S. Court of Federal Claims, judgments have been rendered in six cases, awarding the plaintiffs $983 million from the federal government.27 Four of 

these cases were on appeal to the U.S. Federal Circuit Court of Appeals; the other two were 

recent decisions, and appeals are likely. In another five cases, settlements have been reached 

with plaintiffs receiving approximately $135 million. Another 3 cases had been tried and were 

awaiting decision; 7 cases had been dismissed; 12 cases had been consolidated with others; and 

miscellaneous actions have been taken in 3 others. 

In cases involving approximately 40 failed thrifts, the FDIC as successor to the closed institutions had become a co-plaintiff in goodwill suits against the United States. Only two of those 

cases had been decided as of July 31, 2000, and the trial court awarded the FDIC-managed 

receiverships $19.8 million. All parties appealed one of the decisions, and an appeal of the second decision is expected. 

26 The case was Winstar Corporation v. United States, 90-8C; United Savings Bank, Windom, MN. 


27 Most of the $983 million in judgments against the government came from one case: Glendale Federal Bank, FSB, of
 

Glendale, California, was awarded a judgment of $908.9 million. 

Table A.1
 

Status of Goodwill Cases as of July 31, 2000
 

Settlements/ 

Judgments 

Case Status Number ($Millions) 

Cases with judgments paida 2 $ 40 

Cases pending trial 103 

Cases with unpaid judgments 6 983 

Cases settledb 5 135 

Cases tried and awaiting decisions 3 

Cases dismissed 7 

Cases consolidated into others 12 

Other 3 

Total 141 $1,158 

Source: FDIC. 

aThese cases were decided at District Courts. All remaining cases were 

consolidated to the U.S. Court of Federal Claims. 

bIn one case (Winstar), the Department of Justice settled with the shareholder plaintiff but not with the FDIC. The settlement amount is included 

here even though the case was pending trial as of July 31, 2000. 

34 
The Cost of the Savings and Loan Crisis 

REFERENCES
 

Barth, James R. 1991. The Great Savings and Loan Debacle. American Enterprise Institute Press. 

Barth, James R., and R. Dan Brumbaugh, Jr. 1992. “Depository Institution Failures and Failure 

Costs: The Role of Moral-Hazard and Agency Problems.” In Rebuilding Public Confidence 

through Financial Reform, Conference Proceedings, 3–19. Ohio State University. 

Barth, James R., R. Dan Brumbaugh, Jr., Daniel Sauerhaft, and George Wang. 1985. “Thrift 

Institution Failures: Causes and Policy Issues.” In Proceedings of the Conference on Bank 

Structure and Performance. Federal Reserve Bank of Chicago. 

Bennett, Randall, and Christine Loucks. “The Politics and Length of Time to Bank Failure: 

1986–1990.” Contemporary Economic Policy 14 (1996):29–41. 

Bierman, Leonard, Donald Fraser, and Asghar Zardkoohi. “On the Wealth Effects of the 

Supervisory Goodwill Controversy.” Journal of Financial Research 22, no. 1 (1999):69–81. 

Blalock, Joseph, Timothy Curry, and Peter Elmer. “Resolution Costs of Thrift Failures.” FDIC 

Banking Review 4, no. 1 (1991):15–25. 

Federal Deposit Insurance Corporation. 1997. “The Savings and Loan Crisis and Its Relationship 

to Banking.” In History of the Eighties, Lessons for the Future: An Examination of the 

Banking Crises of the 1980s and Early 1990s. Vol 1. Federal Deposit Insurance 

Corporation. 

Kane, Edward J. 1989. The S&L Insurance Mess: How Did it Happen? Urban Institute Press. 

Marino, James, and Rosalind Bennett. “The Consequences of National Depositor Preference.” 

FDIC Banking Review 12, no. 2 (1999):19–38. 

Seidman, L. William. 1993. Full Faith and Credit: The Great S&L Debacle and Other Washington 

Sagas. Times Books. 

Thomas, Kenneth J. American Banker (September 1, 2000):13. 

White, Lawrence J. 1991. The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation. 

Oxford University Press. 

35 
FDIC Banking Review 

Recent Developments
 

Affecting Depository
 

Institutions
 

by Lynne Montgomery*
 

REGULATORY AGENCY ACTIONS
 

Interagency Actions 

Consumer Privacy Rules 

On May 10, 2000, the Federal Reserve Board, the 

Federal Deposit Insurance Corporation (FDIC), the 

Office of the Comptroller of the Currency (OCC), 

and the Office of Thrift Supervision (OTS) issued final regulations implementing the provisions of the 

Gramm-Leach-Bliley Act (GLBA) governing the privacy of consumer financial information. The regulations limit disclosure by financial institutions of 

“nonpublic personal information” about individuals 

who obtain financial products or services for personal 

purposes. The regulations impose three main requirements established by GLBA: (1) financial institutions must provide initial notices to customers 

about their privacy policies, describing the conditions 

under which the institutions may disclose nonpublic 

personal information to affiliates and nonaffiliated 

third parties; (2) financial institutions must provide 

annual notices of their privacy policies to their current customers; and (3) financial institutions must 

give consumers a reasonable opportunity to “opt out” 

of allowing the financial institutions to share information about them with nonaffiliated third parties. 

The privacy rules are effective as of November 13, 

2000, but compliance is voluntary until July 1, 2001. 

PR-32-2000, FDIC, 5/10/00. 

Federal Deposit Insurance Corporation 

Report on Underwriting Practices 

The April 2000 issue of the Report on Underwriting 

Practices reported a slight decrease in the overall potential risk associated with current underwriting 

practices at FDIC-supervised banks during the six 

months ending March 31, 2000, compared to the previous six-month period ending September 30, 1999. 

However, examiners reported that risky underwriting 

practices for agricultural, construction and commercial real-estate lending remain causes for concern. 

Examiners also noted continued problems with the 

level of “carryover debt” at FDIC-supervised banks 

actively making agricultural loans. Carryover debt 

refers to loans that are not paid off at the end of the 

growing season and are subsequently carried over 

into the next growing season. The survey of loan underwriting practices is aimed at providing early warnings of potential problems in underwriting practices 

at FDIC-supervised, state-chartered nonmember 

banks. The focus of the survey is threefold: material changes in underwriting standards for new loans, 

degree of risk in current practices, and specific aspects of the underwriting standards for new loans. 

*Lynne Montgomery is a senior financial analyst in the FDIC’s Division 

of Research and Statistics. 

Reference sources: American Banker (AB) and BNA’s Banking Report 

(BBR). 

36 
Recent Developments 

The April report includes surveys from 1,158 FDICsupervised banks that were examined during the six 

months ending March 31, 2000. Report on Underwriting 

Practices, FDIC, April 2000. 

Financial Results for 


Fourth-Quarter 1999
 

The FDIC reported that the Savings Association 

Insurance Fund (SAIF) earned income of approximately $441 million for the calendar year 1999; however, the Bank Insurance Fund (BIF) experienced a 

comprehensive loss (net loss plus unrealized loss on 

available-for-sale securities) of $198 million for the 

year. At December 31, 1999, the BIF balance was approximately $29.4 billion, down from $29.6 billion at 

year-end 1998. The decrease in the fund balance was 

primarily attributable to unanticipated and high-cost 

bank failures. Seven BIF-insured banks failed in 

1999, with total assets at failure of $1.4 billion. BIF 

revenues totaled $1.8 billion in 1999, including $1.7 

billion in interest on investments in U.S. Treasury 

obligations and $33 million in deposit insurance assessments. The SAIF closed the year with a fund 

balance of $10.3 billion, an increase from $9.8 billion 

at year-end 1998. The SAIF earned $601 million in 

revenue during 1999, consisting of $586 million in interest on investments in U.S. Treasury obligations 

and $15 million in deposit insurance assessments. 

The FSLIC Resolution Fund (FRF) returned $4.2 

billion in appropriated funds to the U.S. Treasury 

during 1999, pursuant to the RTC Completion Act. 

The Act required the FDIC to return any funds that 

were transferred to the Resolution Trust Corporation 

(RTC) but were not needed to satisfy obligations of 

the RTC. FRF assets in liquidation were reduced to 

$509 million on December 31, 1999. The FRF was 

established in 1989 to assume the remaining assets 

and obligations of the former Federal Savings and 

Loan Insurance Corporation (FSLIC). On January 1, 

1996, the former Resolution Trust Corporation’s financial operations were merged into the FRF. BBR, 

5/15/00, p. 865. 

Assessment Rates Maintained 

The FDIC Board of Directors voted on May 10, 

2000, to maintain the existing insurance assessment 

rate schedules for both the BIF and the SAIF 

through December 2000. Since the FDIC applies a 

risk-based assessment system for insurance coverage, 

the healthiest institutions currently pay nothing for 

insurance and the weakest institutions pay up to 27 

cents per $100 of insured deposits. Federal law requires the FDIC to maintain a minimum reserve ratio of 1.25 percent, or $1.25 for every $100 of insured 

deposits, in the BIF and the SAIF to cover the costs 

of bank and thrift failures. As of December 31, 1999, 

the BIF reserve ratio was 1.36 percent and the SAIF 

ratio was 1.45 percent. BBR, 5/15/00, p. 865; AB, 5/11/00. 

Bank Failures 

On March 10, 2000, the OTS closed Mutual 

Federal Savings Bank of Atlanta, Atlanta, Georgia, 

and named the FDIC as receiver. Mutual Federal 

had total assets of approximately $33.8 million as of 

November 30, 1999. Citizens Trust Bank, Atlanta, 

Georgia, assumed approximately $30 million of the 

failed institution’s deposits in approximately 6,023 

deposit accounts, while five additional accounts were 

pledged as capital. Citizens Trust paid a premium of 

$2.4 million for the right to assume the deposits and 

to purchase approximately $29.8 million of the assets. 

The FDIC will retain the remaining assets for later 

disposition. As part of the transaction, Citizens Trust 

will participate in a three-year loss-sharing arrangement on approximately $9.4 million of the assets that 

were purchased from the receivership. The FDIC 

estimates this transaction will cost the SAIF approximately $1.5 million. Mutual Federal was the first 

SAIF-insured institution failure in 2000. PR-17-2000, 

FDIC, 3/10/00. 

Monument National Bank, Ridgecrest, California, 

was closed by the OCC on June 2, 2000, and the 

FDIC was named receiver. The OCC declared that 

the failed bank was critically undercapitalized—the 

bank’s tangible equity capital was less than 2 percent 

of its total assets—which resulted from poor credit 

administration practices and a high volume of classified assets. The failed bank had total assets of approximately $10 million and total deposits of $9.8 

million. Israel Discount Bank of New York assumed 

all of Monument National’s deposits, and paid a premium of $400,000 to purchase $3.7 million of the assets. The FDIC will retain the remaining assets for 

later disposition. The FDIC estimates that this 

transaction will cost the BIF less than $100,000. This 

is the second failure of a BIF-insured bank in 2000. 

PR-39-2000, FDIC, 6/2/00. 

On July 14, 2000, Minnesota’s Commissioner of 

Commerce closed Town and Country Bank of 

Almelund, Almelund, Minnesota, and the FDIC was 

appointed receiver. The failed institution had total 

deposits of $27.7 million in approximately 4,900 ac37 
FDIC Banking Review 

counts and total assets of $30.1 million. S&C Bank, 

Minnesota, a newly chartered subsidiary of S&C 

Banco, Inc., New Richmond, Wisconsin, paid a premium of $2.9 million for the right to assume the 

failed institution’s insured deposits and to purchase 

approximately $11.1 of the failed bank’s assets. In a 

separate transaction, Queen City Federal Savings 

Bank, Virginia, Minnesota, paid a premium of 

$399,000 to the FDIC to purchase $9.0 million of 

Town and Country’s assets. The FDIC will retain 

the remaining assets for later disposition. The FDIC 

estimates that this transaction will cost the BIF approximately $2.8 million. This is the third failure of 

a BIF-insured institution in 2000. PR-49-2000, FDIC, 

7/14/00. 

Federal Reserve Board 

Interest Rates 

On March 21, 2000, the Federal Open Market 

Committee (FOMC) voted to raise the targeted federal funds rate by 25 basis points, increasing the rate 

from 5.75 percent to 6.0 percent. In a related action, 

the Board of Governors approved a 25-basis-point increase in the discount rate, raising the rate from 5.25 

percent to 5.50 percent. The FOMC raised the federal funds rate an additional 50 basis points on May 

16, 2000, increasing the rate to 6.50 percent. The 

Board of Governors also approved a 50-basis-point increase in the discount rate, raising the discount rate 

to 6.0 percent. The federal funds rate is the fee that 

banks charge each other for overnight loans, and the 

discount rate is the fee charged to financial institutions for borrowing from their district Federal 

Reserve Banks. PR-FRB, 3/21/00; PR-FRB, 5/16/00. 

Survey on Bank Lending Practices 

In its May 2000 Senior Loan Officer Opinion Survey 

on Bank Lending Practices, the Federal Reserve Board 

reported that both domestic and foreign banks were 

tightening lending practices. The percentage of domestic banks becoming more cautious in their lending was the highest since the results of the 

November 1998 survey. Most banks reported an uncertain or less favorable economic outlook as the motivation for tightening their practices. The Federal 

Reserve reported that a significant number of banks 

raised their lending standards for commercial real-estate loans, and the lending standards for residential 

mortgages remained unchanged. The Federal 

Reserve also reported that the demand for bank loans 

slackened for both the residential and commercial 

real-estate markets. For the report, the Federal 

Reserve surveyed loan officers from 57 large domestic banks and 21 U.S. branches and agencies of foreign banks. The survey focused on changes during 

the preceding three months in the supply and demand for bank loans to households and businesses. 

BBR, 5/29/00, p. 957. 

Reporting Requirements under 


Bank Secrecy Act
 

Beginning July 1, 2000, financial institutions will 

be excused from reporting certain cash transactions 

involving more than $10,000. Under the Bank 

Secrecy Act, financial institutions generally are required to report currency transactions of over 

$10,000. However, in September 1997, the Treasury 

Department’s Financial Crimes Enforcement Network (FinCEN) issued a final rule listing “Phase I” 

exemptions, which exempt banks from the $10,000 

reporting requirement for transactions involving other banks operating in the United States, departments 

and agencies of the U.S. government, companies listed on certain national stock exchanges, and certain 

subsidiaries of those listed companies. In September 

1998, FinCEN adopted “Phase II” exemptions 

which cover certain non-listed companies as well as 

payroll customers of a financial institution. The 

Phase I and Phase II final rules apply to currency 

transactions after July 1, 2000. BBR, 7/17/00, p. 96. 

Office of the Comptroller of the Currency 

New Rule on Financial Subsidiaries 

The OCC’s final rule implementing the financial 

subsidiary provisions of the Gramm-Leach-Bliley Act 

(GLBA) was published in the Federal Register on 

March 10, 2000. Under the GLBA, national banks 

are permitted to own a financial subsidiary that may 

engage in a variety of expanded financial activities 

that are not permissible for the parent bank. The final rule establishes an expedited filing process for national banks that seek to acquire or engage in 

expanded activities through a financial subsidiary. 

The rule would give the national banks two options. 

Under the first option, a national bank could certify 

in advance that both it and its depository institution 

affiliates are well-capitalized and well-managed. 

Thereafter, the bank would file a notice with the 

OCC when it acquires a financial subsidiary, or 

38 
Recent Developments 

begins a type of expanded financial activity permitted in a financial subsidiary. The second option 

would permit national banks to file a combined certification and notice for a financial subsidiary at least 

five days before acquiring a financial subsidiary or 

beginning expanded financial activities in a financial 

subsidiary. National banks continue to have the option of using operating subsidiaries to conduct bankpermissible activities. The new rule also streamlines 

processes for national banks to establish operating 

subsidiaries by significantly expanding the list of activities eligible to be conducted pursuant to a simple 

notice filing. This new streamlined process is available for well-capitalized, well-managed national 

banks. NR 2000-16, OCC, 3/9/00. 

Training for Foreign Examiners 

In response to requests from foreign bank supervisors for American-style exam training, the OCC is 

conducting a training course for foreign examiners. 

The first training class will be given in October 2000, 

and eventually the course will be offered several 

times a year. The course is an attempt to show foreign examiners how the OCC examines a bank and 

supervises using a risk-based approach. AB, 4/27/00. 

Procedures for Stock Splits 

On May 9, 2000, the OCC issued an advisory letter detailing its review procedures covering national 

banks’ use of reverse stock splits. A reverse stock 

split is a method of reducing the number of outstanding shares or shareholders in a bank, and restructuring ownership interest. Under a reverse 

stock split, a bank exchanges one share of stock for 

several outstanding shares and pays cash to shareholders that would have held fractional shares after 

the exchange. When reviewing an application for a 

reverse stock split, the OCC will consider several details, including whether the bank: will perform each 

step of the reverse stock split process in compliance 

with legal requirements governing its capital structure; has adopted corporate governance provisions 

that authorize reverse stock splits; has a legitimate 

corporate purpose for undertaking the reverse stock 

split; and provides adequate dissenters’ rights to its 

shareholders. The OCC will approve a reverse stock 

split application on an expedited basis if the bank includes certain certifications with its application. The 

bank must also demonstrate compliance with the 

minimum capital requirements for a national bank on 

the basis of the population of the bank’s main office 

location. BBR, 5/15/00, p. 872–873. 

Office of Thrift Supervision 

Information-Sharing Agreements 

On May 24, 2000, the OTS announced that an additional 13 states and the District of Columbia signed 

information-sharing agreements with the OTS, 

bringing the total number of states with agreements 

to 16. The agreements provide for sharing nonpublic information on the financial solvency of insurance 

companies and any depository institutions owned by 

the insurance companies that fall within the jurisdiction of the respective state insurance commissioner 

and the OTS. The agreements also cover insurance 

and thrift activities, as well as consumer complaints 

of these entities. In addition to the District of Columbia, the new states signing agreements are Arizona, 

Arkansas, Connecticut, Delaware, Indiana, Kansas, 

Louisiana, Michigan, Mississippi, Nebraska, North 

Dakota, Oklahoma, and Utah. Kentucky and Iowa 

signed agreements in the spring of 2000. OTS 00-48, 

5/24/00. 

Federal Housing Finance Board 

Chairman Resigns 

Bruce A. Morrison resigned from his position as 

chairman of the Federal Housing Finance Board on 

July 4, 2000. Mr. Morrison had served as chairman of 

the Federal Housing Finance Board since June 1, 

1995. He plans to join GPC/O’Neill, which is the 

U.S. division of GPC International, a worldwide 

strategic government relations, public affairs, and 

communications consulting firm. FHFB 00-18, 6/6/00. 

Leichter Appointed to Board 

On August 4, 2000, President Clinton made a recess appointment of Franz S. Leichter to the Federal 

Housing Finance Board. Mr. Leichter’s nomination 

had been pending since June 1999. Before this appointment, Mr. Leichter was a practicing attorney 

with the law firm of Walter, Conston, Alexander, and 

Green, P.C. He also served in the New York State 

Senate from 1975 to 1988. FHFB 00-26, 8/4/00. 

Final Regulation on Membership and
 

Advances Requirements
 

On June 23, 2000, the Federal Housing Finance 

Board approved a final regulation that eases requirements for Federal Home Loan Bank membership 

and removes restrictions on borrowing by banks. 

Under the new rule, community financial institutions 

39 
FDIC Banking Review 

(CFIs) no longer need at least 10 percent of total assets in residential mortgages to join the FHLBank 

System. CFIs are FDIC-insured institutions with assets of less than $500 million. The final rule also allows non-qualified thrift lenders equal access to the 

FHLBank System advances. A qualified thrift 

lender is one that has at least 60 percent of its assets 

in residential mortgages. The final rule repeals the 

following former rules concerning non-qualified 

thrift lenders (non-QTL): non-QTL members were 

limited in how much they could borrow in advances; 

total advances outstanding to non-QTL members 

could not exceed 30 percent of the FHLBank 

System total; and non-QTL members had a higher 

advances-based stock purchase requirement. BBR, 

7/3/00, p. 25. 

Expanded Collateral for FHLBank
 

Advances
 

The Federal Housing Finance Board approved a 

final rule on June 29, 2000, implementing provisions 

of the Gramm-Leach-Bliley Act (GBLA) that enable 

community financial institutions (CFIs) to pledge 

additional classes of collateral for Federal Home 

Loan Bank advances. The new types of collateral 

that can be pledged by CFIs include: small-business 

loans, agricultural loans, or securities representing a 

whole interest in such loans. However, before accepting the new collateral, a FHLBank must demonstrate that it has the proper procedures in place to 

value and discount the collateral and manage the 

risks associated with the collateral. The final rule 

also implements a provision in GLBA that removes 

the limit on the amount of other real-estate-related 

collateral that FHLBank System members can 

pledge for Federal Home Loan Bank advances. The 

amount had previously been capped at 30 percent of 

a member’s capital. FHFB 00-21, 6/29/00. 

Final Rule on Mission for FHLBanks 

On June 29, 2000, the Federal Housing Finance 

Board approved a final rule that implements provisions of the Gramm-Leach-Bliley Act by setting 

guidelines for the core mission activities of the 

Federal Home Loan Banks. Under the final rule, 

core mission activities of the FHLBanks will include: making loans or advances to member financial 

institutions; issuing standby letters of credit; and 

making targeted investments that support affordable 

housing, economic development activities, and 

small-business investment corporations. A proposed 

rule was issued for comment on April 17, 2000. On 

the basis of the comments received, the final rule 

eliminates language in the proposed rule that would 

have grandfathered the FHLBanks’ existing holdings of mortgage-backed securities (MBSs) until maturity. The final rule allows certain MBS 

investments if they benefit targeted households, 

offer liquidity for other loans not available in the primary market, or are not sold in the secondary market. 

Further, the final rule allows acquired member assets, 

such as Federal Housing Administration-insured 

loans, to count as core mission activities. BBR, 7/10/00, p. 

67–68. 

National Credit Union 

Administration 

Consumer Privacy 

The NCUA issued a final privacy rule applicable 

to all federally insured credit unions, as required by 

the Gramm-Leach-Bliley Act. The final rule requires credit unions to have a privacy policy and provide certain disclosures and notices to individuals 

about whom credit unions collect nonpublic personal 

information. The rule also restricts a credit union’s 

ability to disclose nonpublic personal information, including giving individuals an opportunity to opt out 

of the disclosure. The NCUA’s final rule takes into 

account the unique circumstances of federally insured credit unions and their members but is comparable and consistent with the privacy regulations 

issued by the federal banking agencies. The rule is 

effective November 13, 2000; however, compliance is 

not required until July 1, 2001. 12 CFR Part 716, NCUA, 

5/8/00. 

Final Rule on Electronic Disclosure 

The NCUA issued a final rule amending its regulations that implement the Truth in Savings Act to 

permit periodic disclosures required by NCUA’s regulations to be delivered in electronic form, if a credit 

union member agrees. The rule gives credit unions 

flexibility in how they deliver the electronic disclosures. In addition, the rule gives credit unions the 

option of not using electronic delivery methods at all, 

but the NCUA expects that those credit unions that 

use electronic delivery will realize a reduction in 

their costs of delivery as a result. The final rule, 

which is effective beginning May 20, 2000, amends 

an interim rule that was approved on November 18, 

1999. BBR, 5/1/00, p. 795. 

40 
Recent Developments 

Prompt Corrective Action for ficiaries included a spouse, child, or grandchild; howUndercapitalized Credit Unions 

In February 2000, the NCUA approved a final rule 

that implements a system of prompt corrective action 

(PCA) to restore the net worth of federally insured 

credit unions that are undercapitalized. The PCA 

rule permits the NCUA to take discretionary action 

against critically undercapitalized credit unions. An 

undercapitalized credit union is one with a net worth 

ratio of less than 2 percent that is not a new credit 

union. On April 20, 2000, the NCUA published a final rule on secondary capital accounts for low-income 

credit unions, which conforms to the PCA rule. The 

secondary capital rule clarifies that the NCUA has 

discretionary authority to prohibit a credit union from 

paying principal, dividends, or interest on the credit 

union’s secondary capital accounts set up after 

August 7, 2000, which is the effective date of the 

PCA rule. BBR, 5/1/00, p. 795. 

Final Rule on Share Insurance and Joint 

Accounts 

On May 24, 2000, the NCUA approved a final rule 

that expands insurance coverage on some revocable 

trust accounts and clarifies the insurance coverage on 

joint accounts. Revocable trust accounts allow owners of those accounts to pass funds to one or more 

beneficiaries when the owner dies. The list of beneever, the new coverage rule adds parents and siblings 

to the list of eligible beneficiaries. The final rule also 

expands the maximum coverage on any joint account 

owned by more than one person from $100,000 for 

each joint account to $100,000 for each individual 

owner. The NCUA issued interim rules amending 

share insurance coverage in April 1999. The final 

rule adopted the interim rules without major 

changes. BBR, 5/29/00, p. 976. 

Loan Rate Ceiling Maintained 

The NCUA approved a final rule to maintain the 

current 18 percent interest-rate ceiling on loans by 

federal credit unions, instead of allowing the ceiling 

to revert to 15 percent. The rate ceiling was scheduled to revert to 15 percent on September 9, 2000; 

however, with the new ruling, the ceiling will remain 

at 18 percent for the period from September 9, 2000, 

through March 8, 2002. The NCUA reported that a 

15 percent ceiling would restrict certain categories of 

credit and adversely affect the financial condition of 

a number of federal credit unions. At the same time, 

prevailing market rates and economic conditions do 

not justify a rate higher than the current 18 percent 

ceiling. The NCUA Board is prepared to reconsider 

the 18 percent ceiling at any time should changes in 

economic conditions warrant. 12 CFR Part 701, NCUA, 

7/13/00. 

STATE LEGISLATION AND REGULATION
 

New York 

On June 7, 2000, the New York State Senate confirmed Elizabeth McCaul as the superintendent of 

the state Banking Department. As superintendent, 

Ms. McCaul will also chair the state’s Banking Board, 

which issues banking regulations. Ms. McCaul had 

been the acting superintendent since 1997. BBR, 

6/12/00, p. 1045. 

BANK AND THRIFT PERFORMANCE
 

Fourth-Quarter 1999 Results for
 

Commercial Banks and Savings
 

Institutions
 

FDIC-insured commercial banks earned $17.8 billion during the three months from October through 

December 1999, which represents a 20 percent improvement over the $14.8 billion earned in the fourth 

quarter of 1998. The improvement in earnings resulted from strong growth in noninterest income and 

lower noninterest expenses. Banks’ annualized return on assets (ROA) was 1.27 percent in the fourth 

quarter, up from 1.10 percent one year earlier. The 

number of commercial banks on the FDIC’s 

“Problem List” declined from 69 in the third quarter 

of 1999 to 66 in the fourth quarter; however, assets of 

problem commercial banks increased from $4.2 billion to $4.5 billion. There were seven bank failures 

in 1999, and two of those failures occurred during the 

fourth quarter. 

41 
FDIC Banking Review 

FDIC BIF-insured mutual savings institutions reported earnings of $2.7 billion in the fourth quarter of 

1999, which is down by $132 million from the third 

quarter but up by $678 million from one year earlier. 

The earnings decline was caused by higher interest 

costs and lower yields from sales of securities during 

the quarter. The industry’s ROA for the fourth quarter was 0.96 percent, down from 1.00 percent in the 

third quarter but up from 0.76 percent in the fourth 

quarter of 1998. The number of problem thrifts increased to 13 thrifts with assets of $5.5 billion, up 

from 11 thrifts in the third quarter with assets of $3.9 

billion. There were no thrift failures during the 

fourth quarter of 1999, although there was one failure 

earlier in the year. FDIC Quarterly Banking Profile, Fourth Quarter 

1999. 

First-Quarter 2000 Results for Commercial 

Banks and Savings Institutions 

FDIC-insured commercial banks earned a recordsetting $19.5 billion during the first quarter of 2000, 

which is $125 million greater than the previous 

record set in the third quarter of 1999 and $1.6 billion 

higher than earnings in the first quarter of 1999. The 

increased earnings resulted from gains on equity investments and from the current favorable economic 

conditions. Commercial banks’ average ROA was 

1.35 percent in the first quarter of 2000, up from 1.32 

percent in the first quarter of 1999. The number of 

commercial banks on the FDIC’s “Problem List” increased to 72, from 66 in the fourth quarter of 1999. 

There was one bank failure during the first quarter. 

FDIC BIF-insured mutual savings institutions reported earnings of $2.9 billion in the three months 

from January through March 2000, which is $259 million higher than one year earlier. Higher noninterest 

income and lower income tax expenses accounted for 

the earnings increase. The industry’s ROA for the 

first quarter was 1.03 percent, up from 0.98 percent in 

the first quarter of 1999. The number of problem 

thrifts increased to 15, from 13 in the fourth quarter 

1999; however, problem assets decreased from $5.5 

billion to $5.3 billion. There was one thrift failure 

during the first quarter of 2000. FDIC Quarterly Banking 

Profile, First Quarter 2000. 

RECENT ARTICLES AND STUDIES
 

A study released by the Treasury Department on 

April 19, 2000, reports that mortgage lending to lowand moderate-income borrowers in communities 

covered by the Community Reinvestment Act 

(CRA) increased at over twice the rate of loan growth 

to other borrowers between 1993 and 1998. The 

CRA is a 1977 law that requires financial institutions 

to make financial services available to all segments of 

the communities where they do business. The 

study, entitled The Community Reinvestment Act After 

Financial Modernization: A Baseline Report, reviewed 

lending trends in 304 cities across the nation between 1993 and 1998, and found that mortgage loans 

made during that period by CRA-covered institutions and their affiliates to low- and moderate-income borrowers increased by 39 percent. The 

Gramm-Leach-Bliley Act mandated that the 

Treasury Department conduct the study to determine the extent to which sufficient services are being provided under CRA. BBR, 4/24/00, p. 729. 

According to a report released on May 16, 2000, by 

the FDIC’s Division of Insurance, community banks 

and thrifts could be more susceptible to rising interest rates than in recent years. The structure of commercial financial institutions’ balance sheets has 

begun to reflect increased interest-rate risk exposure, which primarily results from mismatches in the 

term structure of the balance sheet. The report says 

that more institutions’ balance sheets are showing increased long-term mortgage holdings and longer asset maturities, and the industry is relying more on 

potentially volatile funding sources. Additionally, 

the report notes that the percentage of institutions 

downgraded by examiners from the “satisfactory” 

rating for interest-rate risk in the second and third 

quarters of 1999 exceeded the percentage of institutions that were upgraded. Overall, however, roughly 

94 percent of financial institutions examined in 1999 

received a “satisfactory” rating. The report is entitled Increasing Interest Rate Risk at Community Banks 

and Thrifts. BBR, 5/22/00, p. 918–919. 

42 
Recent Developments 

INTERNATIONAL DEVELOPMENTS
 

Basel Committee 

The Basel Committee on Bank Supervision issued 

a revised series of voluntary guidelines on February 

29, 2000, concerning the effective management of 

liquidity by banking organizations. The guidelines 

update earlier recommendations on liquidity management issued by the committee in 1992. The committee’s recommendations include 14 core principles 

covering sound practices for ongoing liquidity management, foreign-currency liquidity management, internal risk controls, public disclosure, and banking 

supervision. The committee’s revised recommendations emphasize the need for contingency planning 

in order to account for the increasing sophistication of 

today’s global financial markets. The committee also 

urges banking supervisors to take an active role by 

carrying out independent reviews of bank liquidity 

management practices. The Basel Committee is 

made up of senior central bank and banking supervisory officials from Belgium, Canada, France, 

Germany, Italy, Japan, Luxembourg, the Netherlands, Sweden, Switzerland, the United Kingdom, 

and the United States. BBR, 3/6/00, p. 455–456. 

France 

The United Kingdom-based Hong Kong and 

Shanghai Banking Corporation announced on April 1, 

2000, plans to carry out a friendly takeover of Credit 

Commercial de France. The merger, which was approved by France’s finance minister on April 4, 2000, 

represents the first time that a French bank has been 

sold to foreign investors. BBR, 4/10/00, p. 674. 

Japan 

On July 1, 2000, the Japanese government established a new regulatory body, the Financial Services 

Agency (FSA), which is responsible for supervising 

securities, banking, insurance, and other financial activities. The FSA is also responsible for drafting policies and plans related to these sectors. The new 

agency was formed by merging the Financial 

Supervisory Agency and the Ministry of Finance’s 

Financial Planning Bureau. The Financial Supervisory Agency was created two years ago to take over 

the Ministry of Finance’s financial supervisory and 

inspection functions. In January 2001, the Financial 

Revitalization Agency—which is responsible for the 

reconstruction of the Japanese financial industry 

through the mobilization of taxpayer money, mergers, and other means—will also be merged into the 

new agency. Masaharu Hino, who served as directorgeneral of the Financial Supervisory Agency, was appointed commissioner of the new agency. BBR, 7/17/00, 

p. 120–121. 

43