Epilogue

This history has been written from a 1983 perspective, and the importance given to certain earlier events might have been quite different had this been, for example, a 40-year history written in 1973. In several chapters, discussion has been divided into three periods: the Depression and post-Depression years of the 1930s; the long period of few bank failures and low unemployment running for about 30 years from the onset of World War II;and the past ten years, when banking markets have been more competitive, the economic environment has been more hostile and the number and size of bank failures have increased. These divisions require some convenient simplifications. While the number of bank failures remained high through the early 1940s, many of these resulted from problems encountered much earlier. Banking conditions had actually stabilized as early as the mid-1930s. Also, banking did not suddenly become more competitive and deregulated in 1973; that process was well underway during the 1960s.

The issues and problems faced by the FDIC today are very different from those faced 20 or 25 years ago. Many changes have occurred in the financial services industry in recent years and are continuing. In 1980 and 1982, Congress passed major legislation that has significantly affected banks and financial markets. Congress is currently considering legislation that could substantially alter the activities permitted by banks and thrift institutions and the manner in which they are to be regulated.

In 1983, loan losses at commercial banks were at their highest rate in 40 years and, for the most part, these figures did not include the enormous volume of rescheduled loans in less developed countries. Bank capital ratios, while not materially changed in recent years, were close to their lowest level since anyone started counting. Most thrifts, which have become less distinguishable from commercial banks, were seriously under-capitalized, even if one focused on book values. At the same time, competition has been increased in many areas. As entry barriers are dismantled and many banks and thrifts anticipate selling out to larger institutions, they find their franchise values have diminished.

The number of bank failures in 1983 surpassed that of any year since 1939. Even in an improving economic environment, a more competitive banking system is likely to result in more bank failures than the FDIC was used to up until the past few years.

The FDIC has been very active in the past decade in an environment characterized by two very steep recessions, a high inflation rate and wide swings in interest rates. Failures, for the most part, have been handled smoothly and at modest cost. Confidence in the banking system has been retained.

Some argue that the FDIC has provided too much protection to large depositors, with the result that there has been insufficient depositor discipline. These issues are addressed in the FDIC deposit insurance study, which was published in the spring of 1983. If banking is to be less regulated, then de facto insurance coverage probably has to be reduced or some other device - perhaps more private capital - probably needs to cushion the system from loss and restrain excessive risk taking. In November 1983, the FDIC introduced legislation designed to strengthen its position as an insurer. This legislation would enable the FDIC to price insurance more in line with bank risk and would make it easier for the FDIC to pay off rather than merge failed banks, thereby reducing de facto insurance coverage.

In 1984, the deposit insurance and supervisory systems will be under active scrutiny. There. is a general appreciation that deposit insurance as an institution is very important to our system today - ten years ago that might not have been the case. There is an increasing appreciation that it is insurance that sets depository institutions apart and affords the rationale for federal supervision.

It is not the function of this history to predict how the FDIC will evolve in the future. In periods of adversity or change, the stability provided by the FDIC has tended to gain importance, and as this 50th anniversary passes, the FDIC's importance seems greater than at any time since the 1930s.

Appendix

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