FDIC And The Savings And Loan Crisis

7 Pages 1779 Words

What happens when businesses fail? The inevitable consequence of failed business is a series of hardships for creditors, owners and customers. This can be said to be a miniscule in comparison to what happens when a depository institution fails. The financial collapse of a depository institution will create a more serious problem since there a great deal of individuals and businesses that depend of the security and support of banks. The Federal Deposit Insurance Corporation was founded to insure the funds of depositors and to eliminate the ruinous effect of bank runs. The following is an example of such a situation taken from the New York Times “ethemes”:

“Nervous depositors hoping to withdraw their money were lined up eight-across outside the Abacus Federal Savings Bank branches in Chinatown for the second day in a row yesterday… Despite Mr. Sung's air of confidence and smile, thousands of people withdrew their money, emptied their safe deposit boxes or just checked for themselves that their money was safe at the bank's two Chinatown branches. A similar rush was reported at the Abacus branch in Philadelphia… It began on Tuesday, when word circulated around Chinatown that a manager at the Canal Street branch, Carol Lim, was fired after she was accused of embezzling money… "This is just another hit for everyone here," said Mela Malin, a reporter for NTD-TV, one of several Chinese-language TV stations covering the bank run. "Chinese people have just an inherent distrust of government and financial institutions."
The above mentiond is a perfect example of a bank run, a term used to describe the simultaneous rush of depositors who attempt to convert their demand deposits or time deposits into currency. This occurs whenever a bank begins to look unstable; that is if it seems that the bank’s assets may not be enough to cover the banks liabilities. If the bank does not have any type of deposit insurance the depositors and a...