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

Various proposals to enhance the safety and soundness of the banking system have been debated in recent years, and some of these proposals have been enacted into law. But the debate, and the legis!afive changes, have 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, most proposals have 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. Examples include the money center banks’ exposure to loans to less developed countries around 1980 and the commercial real estate boom and bust cycles in New England and parts of the Mid-Atlantic region in the late 1980s. The focus of the symposium will be to examine the likely effectiveness of the various proposals for change in the context of financial cycles and the role of banking in the economy.