Friday, August 7, 2009

structural weknesses in federal deposit insurance

as we indicated in our review of the history of federal deposit insurance, congress recognized the need for a large regulatory structure to deal with the moral hazard problem that stems from deposit insurance. Despite its best efforts, however, Congress created a deposit insurance system with two key structural weaknesses. First, the present system has proved to be poorly equipped to adapt itself to efforts of depository institutions- whether intentional or unintentional-to increase the risks they incur. second, the system has entrusted significant power to regulators without safeguards against the risk that regulators themselves may make bad adjustments.

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