Academic journal article ABA Banking Journal

Throwing Brickbats at the BIF-Bashers

Academic journal article ABA Banking Journal

Throwing Brickbats at the BIF-Bashers

Article excerpt

Throwing brickbats at the BIF-bashers

Despite the pessimists, there's only one problem with BIF--remembering what the letters stand for.

Barely a month after President George Bush signed the Financial Institutions Reform, Recovery and Enforcement Act of 1989, a new study warned that the Bank Insurance Fund was overstated by some $10 billion.

The study's authors, testifying before a House Banking subcommittee, also cited "disturbing parallels between the problems in the banking and thrift industries."

The study earned early credibility in part because of its authors' credentials: R. Dan Brumbaugh, Jr., Stanford University; Andrew S. Carron, First Boston Corp.; and Robert E. Litan, the Brookings Institution.

However, since their study was released, others have reviewed the BIF analysis and formed their own conclusions about the fund's strength.

ABA analysis. In October, an internal ABA analysis concluded, among other things, that the trio's study contained major flaws regarding timing and costs. For example, it paired 1988 bank data with June 1989 BIF data. Thus, the majority of the insolvent banks used in the study had been closed and taken off the books, and were already reflected in the June 1989 BIF balance.

The ABA analysis also pointed out that the average cost-to-failed-bank-as-set ratio used by the study's authors--26%--was high. FDIC data put the ratio at 12%.

Secura analysis. Wading into the fray more recently was none other than William M. Isaac, former FDIC chairman and now managing director and CEO of Secura Group. His analysis, co-authored by James A. Marino, former FDIC assistant director of research and a Secura vice-president, said that the Brumbaugh, Carron, and Litan study contains "fundamental flaws."

Secura's analysis specifically cited the study's failure to properly measure the BIF's future exposure to potential bank failures. …

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