They also had higher growth rates than the banks that did not fail, but these growth rates were sharply cut back as the banks approached failure, as FDIC enforcement actions took effect. This finding suggests that the focus on risk assessment in current supervisory thinking is on target. We regulators can maintain this balance only if we follow the basic principles of bank supervision both in good times and in bad. During good times, we must be alert to problems and do something about them before they result in severe problems for the banking system. We must be just as realistic when the cycle turns down as we are when the cycle is on the upswing.
Banks are in the business of accepting risk as financial intermediaries and of making a profit.
We should not fall into the mindset that problems lurk under every rock and in every loan file. We should justify the balance we maintain as regulators on the basis of fact and critical analysis. Balance in managing deposit insurance means assuring stability in the financial system while addressing the problem of moral hazard that arises from public, or private, deposit insurance. By protecting depositors against loss, deposit insurance virtually eliminates the risk of bank runs and disruptive breakdowns in bank lending that damage the economy. On the other hand, by assuming the risk of losses that would otherwise be borne by depositors, deposit insurance provides incentives for increased risk-taking by bank management, thereby exposing the insurance fund to greater losses.