Working Papers

2006-27 | August 2006

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Safe and Sound Banking, 20 Years Later: What Was Proposed and What Has Been Adopted

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In 1986, a task force of banking academics organized and sponsored by the American Bankers Association convened to examine the banking industry and the efficacy of its regulatory system. The group was charged with reviewing the problems of ensuring the safety and soundness of the banking system and evaluating a number of policy options to improve the efficiency, performance, and safety of the system by changing the structure of the deposit insurance system and the bank regulatory and supervisory process. The results of the work of the task force were published by the MIT Press as the book, Perspectives on Safe and Sound Banking (Benston et al., 1986, the Report), which includes a set of principal options and recommendations. The purpose of this article is to assess the extent to which changes in public policy regarding depository institutions have been aligned with the recommendations of the Report. We find that, over the past 20 years, several legislative initiatives and changes in regulations and the bank supervisory process have been in keeping with the specific recommendations of the Report or with the analytic framework underlying the recommendations. At the same time, other recommendations in the Report have not been taken up and some proposals rejected in the Report have been put in place by legislative and regulatory initiatives. Overall, public policy and private sector initiatives appear to have contributed to safer and sounder banking and thrift sectors over the past 20 years. Consistent with what we see as the main theme of the Report, a likely contributing factor is the more appropriate alignment of incentive for risk-taking among larger depository institutions. Developments affecting risk-taking by depository institutions likely include higher capitalizations, greater risk exposure of private sector stakeholders more generally, improvements in risk management, and supervision and regulation that is focused on overall risk.

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