That strategy did not work. Ultimately, industry losses were many, many times what they would have been had problems been addressed promptly. In contrast, because we had a strong fund, we had the means to address failing and failed institutions quickly. Because we had a strong insurance fund, we could make the hard decisions necessary to turn other troubled institutions around through strict plans to improve performance. Another lesson of that crisis was that the FDIC could reduce losses to the insurance funds by more market discipline in the bank regulation and resolutions process.
Market discipline is as important for banks as it is for any other business.
Because public confidence is necessary for stability in banking, however, small insured depositors are granted certainty. That certainty is the price for stability. Since 1991, the FDIC has been required by law to accept the proposal from a potential purchaser of a failed bank that is the least costly to the insurance fund of all the proposals we receive. That was a significant increase in uninsured depositors experiencing losses as compared to 1991, before the change in the law went into effect, when fewer than 20 percent of the failures involved a loss for uninsured depositors. Risk-based capital standards expose shareholders of an institution to greater loss.