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BANK CAPITAL FORBEARANCE AND PUBLIC POLICY
Author(s) -
KAUFMAN GEORGE G.
Publication year - 1987
Publication title -
contemporary economic policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.454
H-Index - 49
eISSN - 1465-7287
pISSN - 1074-3529
DOI - 10.1111/j.1465-7287.1987.tb00248.x
Subject(s) - forbearance , business , capital requirement , finance , deposit insurance , financial system , capital adequacy ratio , capital (architecture) , market discipline , chinese financial system , economics , incentive , market economy , archaeology , political science , law , china , history
Recently, the bank regulatory agencies have adopted capital forbearance programs to permit some troubled agriculture and energy banks to operate temporarily with capital levels below the regulatory minimum requirement. In a world with federal deposit insurance and a lender of last resort, bank capital is no longer viewed by all depositors as the primary protector of their funds. Thus, they reduce their market discipline. Bank owners/ managers are likely to respond by increasing their risk exposure in an attempt to regain profitability. If they win, they keep all the gains; if they lose, the losses are passed on to the Federal Deposit Insurance Corporation (FDIC). A preferred policy is to require these banks to raise additional capital at this time or to be sold. Capital forbearance is forbearance of incumbent bank management/owners, not of bank customers.