Safeguarding the Banking System in an Environment of Financial Cycles: An OverviewSafeguarding the Banking System in an Environment of Financial Cycles: An Overview

March 31, 1994

Various proposals to enhance the safety and soundness of the banking system have been debated in recent years. But the debate has generally focused on limiting losses to the deposit insurance funds in order to protect taxpayers, rather than on the broader implications for the banking system and its role in financial markets and the economy. Furthermore, proposals have generally not been considered in the context of financial cycles, where changing economic circumstances may reveal risk exposures and the potential for widespread losses in important segments of the banking industry.

In the fall of 1993, the Federal Reserve Bank of Boston sponsored a symposium to consider various proposals to safeguard the banking system in the context of finandal cycles. These proposals included one for timely supervisory intervention against excessive risk concentrations in banks, one for obtaining market discipline from acquirers of subordinated debt, another calling for coinsurance of deposits, and another for functional reorganization of banks to expose all but transaction accounts to market discipline. This article offers an overview of the papers that were presented and the discussion among the participants.

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