WASHINGTON - The Federal Deposit Insurance Corporation Improvement Act of 1991 worked.
That's the conclusion three FDIC economists drew after reviewing data on 69 failed banks - 45 sold before and 24 after the controversial law was enacted.
The economists, in a paper they plan to present early next month at a Chicago Federal Reserve Bank conference, said the law allowed the FDIC to receive a better price for the assets of failed institutions.
John P. O'Keefe, Matthew T. Billett, and Jane F. Coburn found that the FDIC lost just 0.3 cents per $1 of assets after the law took effect compared with 1.7 cents per $1 beforehand.
"It shows that resolutions after FDICIA are much less costly on the whole," Mr. Billett said. "From the time the bank is closed to finishing it off, the FDIC's losses are lower."
The economists based their study on how the market reacted to the buyer's stock after the acquisition was announced. If the stock rose, the market believed the bank got a good deal. If it fell, the market believed the bank got a bad deal. Ideally, the market wouldn't react at all, indicating the buyer paid the correct price.
The economists measured these changes in stock value and compared them to the size of the failed banks.
They found the market reacted less favorably to acquisitions after enactment. This shows that provisions in the act freeing the FDIC from rules limiting how it can sell failed-bank assets worked as Congress intended, the economists concluded. Under the act, Congress required the FDIC to find the "least-costly" resolution.
Several economists questioned parts of the study.
William M. Cunningham, an economist and banking consultant, said it is hard to make such comparisons because so few failures occurred after the act was passed.
"The fact is that there were far fewer banks that went belly up," Mr. Cunningham said. "It is almost as if the sheriff came, but he was a little late with the handcuffs."
The relative shortage of post-enactment failures - there were only 161 - makes it hard for researchers to make valid comparisons, he said.
Michael ter Maat, an economist at the American Bankers Association, said the study isn't reliable because the stock market's reaction to each acquisition varied greatly.
"That's not a slam at the authors," he said. "The data is moving around a lot and it is hard to model."
Mr. O'Keefe, the FDIC economist, said data fluctuations aren't a cause for concern. "It would be great if we had (less fluctuation)," he said. "But, on a cross-sectional analysis these are not unusual."
Mr. ter Maat said he thinks it was the act's requirement that the FDIC close banks earlier that played the greatest role in reducing costs. Tougher capital requirements mandated by the law also helped, he said.
But, the authors note in the study that the FDIC has reduced costs since the law took effect, losing just 8 cents for every insured dollar of deposits, from 19 cents.
The data shows the agency still needs to make significant improvements, Mr. ter Maat said.
"From the ABA perspective, the least-cost resolution is something we've been pushing," he said. "That's why this is a little bit disturbing. There is not clear-cut evidence the FDIC is doing a better job."
