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The changing business of banking; a study of failed banks from 1987 to 1992

The changing business of banking; a study of failed banks from 1987 to 1992

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This historic book may have numerous typos and missing text. Purchasers can download a free scanned copy of the original book (without typos) from the publisher. Not indexed. Not illustrated. 1994-07 Excerpt: ...method of resolution as long as the cost test was satisfied. Under FDICIA, the FDIC is now required to consider all possible methods of resolution and choose the least costly alternative. Usually the FDIC estimates the cost of payout and liquidation as a base case and compares it with costs of alternative methods of resolution. The same techniques are used to calculate estimated costs for various methods of resolution, but the new rule changes the way in which the costs are compared. 1. Richard A. Brown and Seth Epstein, "Resolution Costs and Bank Failures: An Update of the FDIC Historical Loss Model," FDIC Banking Review, vol. 5, no. 1 (Spring-Summer 1992), pp. 1-16. 2. Open-bank assistance includes all forms of financial assistance between the FDIC and an ongoing bank. Upon selecting the method of resolution, the FDIC provides an initial estimate of the resolution cost based on the experience of the FDIC staff in resolving many other failed Banks. The estimate is not that of the full cost borne by all parties in the transaction, but an estimate of the loss to the BIF. That is, it is an initial estimate of how much the insurance fund will lose after the FDIC completes the resolution of the bank and the disposition of its assets. Estimates of losses require, at a minimum, that the FDIC appraise the market value of the assets and liabilities of the failed institution. Insurance Costs and Methods of Resolution Resolution cost estimates represent the present value of losses to the insurance fund and can be measured by an accounting identity that includes market-value assessments of the liabilities and assets and the administrative costs of resolution.3 The basic account ing identity is: Resolution Cost = Realized Liabilities-Realized Value of Asse...