Taxpayer Loss Exposure in the Bank Insurance Fund

Abstract

The root problem in deposit insurance today may be described as a scandal in bank and government accounting. In tough times, the valuation and itemization principles that accountants and regulators use contain reporting options that encourage large opportunity losses to be hidden from public view. They also let discretionary nonrecurring profits be recorded in ways that can overstate current profits and net worths for years on end. The rosy bias in these readings and in projections that are based upon them have much in common with the rigged scales dishonest butchers use to overcharge their clients. With a show of apparent precision, they systematically and repeatedly mismeasure the obligations deposit insurance is putting on to taxpayers’ bill.

This chapter is a revised version of a paper published by the Brookings Institution from Assessing Bank Reform, edited by Robert Litan, 1993. Reprinted with permission.