Powell’s Talk on “Too Big to Fail” Policy and the Lesson from the 1991 Bank Failure

03/12/2023 11:23 • NFT Newsflash • 122 views

It is reported that the Chairman of the Federal Reserve, Powell, delivered an Ending “Too Big to Fail” keynote speech at the 2013 meeting of the International Bankers Association in Washington. In his first speech as a member of the Federal Reserve, he discussed how to deal with bank runs. In January 1991, there was the third largest bank failure in the history of the United States. The financial system and the overall economy were under great pressure. 45 banks were closed and 300000 accounts were affected. At that time, the problem was that either the Federal Deposit Insurance Corporation of the United States protected all bank depositors without considering the deposit insurance limit, or it might face a more severe panic run. At last, the Federal Reserve decided to ignore the maximum insurance amount and protect the full amount in each account.

Powell proposed to protect the full amount of each account in the collapse of the third largest bank in the history of the United States ten years ago

Analysis based on this information:

In 2013, the then-newly-appointed Chairman of the Federal Reserve, Jerome Powell, gave a speech at the International Bankers Association meeting in Washington D.C. where he discussed the issue of “too big to fail” policy and shared a lesson on how banks should deal with bank runs. Powell recounted the story of the third largest bank failure in the United States’ history that occurred in January 1991, which led to the closure of 45 banks and affected 300,000 accounts while putting the nation’s financial system and the economy under great strain.

In light of the crisis, the question was whether Federal Deposit Insurance Corporation’s (FDIC) deposit insurance limit should be disregarded and all bank depositors should be protected to avoid a massive panic run. Powell concluded that ignoring the maximum insurance amount and protecting the full amount in each account was the right call.

Powell’s speech highlights the challenges posed by the “too big to fail” policy of large banks that are so deeply interconnected with the financial system that their potential collapse could lead to a systemic risk. The government has traditionally relied on bailouts to rescue these institutions, but this approach creates moral hazard, making the banks feel immune to failure and incentivizing them to take more risks.

The lesson from the 1991 bank failure is that fast and decisive action by the Federal Reserve was crucial in restoring confidence in the system and mitigating the risk of a panic run. However, it is important to note that Powell was not advocating for a blanket protection of all depositors, as this would have put an extra financial burden on the FDIC and could lead to even more severe consequences down the line. Instead, the case study underscores the need for regulators to take a balanced approach in dealing with bank runs, recognizing the importance of depositor protection while also being mindful of the systemic impact of bank failures.

In conclusion, Powell’s speech on the “too big to fail” policy and his reference to the 1991 bank failure serves as a reminder to the banking industry of the importance of developing effective tools and policies to prevent financial crises. The key takeaway is that proactive measures, careful consideration of depositor protection, and measured responses are essential principles in dealing with such situations, in order to maintain stability and avoid triggering a panic among depositors.

This article and pictures are from the Internet and do not represent SipPop's position. If you infringe, please contact us to delete:https://www.sippop.com/6577.htm

It is strongly recommended that you study, review, analyze and verify the content independently, use the relevant data and content carefully, and bear all risks arising therefrom.