The Federal Deposit Insurance Corporation (FDIC) was established in 1934. The entity responsible for providing this insurance is the FDIC, which is not a private institution but rather an independent financial organization established by the United States federal government.
So theoretically, joining the FDIC insurance program also means that banks are subject to oversight by the United States government. However, compared to joining the Federal Reserve System, the level of oversight is much less stringent.
The core difference between these two regulatory bodies, Carter believed, lies in the nature of their regulatory authorities.
First, let's talk about the Federal Reserve System. Regulatory oversight of the Federal Reserve System originates from the Federal Reserve Board. This is a bona fide government agency, an administrative unit. Simply put, it doesn't have revenue-generating tasks. Its core mission is to ensure stability and the adequacy and stability of the national currency reserves of the United States.
In contrast, the regulatory oversight of the FDIC is different. Although the Federal Deposit Insurance Corporation was also established by the United States federal government, just listen to the name, a corporation! A corporation! A corporation!
Just the fact that they're called a corporation means that, beyond regulatory functions, they're no different from a regular commercial insurance company. They're also in it to make money!
Similar to regular insurance companies, after collecting insurance premiums from various savings banks, the FDIC invests the money into the bank insurance fund, participating in market activities.
The difference in nature between these two entities directly determines their regulatory focus and the level of oversight.
In simple terms, the regulatory focus of the Federal Reserve System is more concerned with fund security! More concerned with the overall monetary reserve security and stability of the Federal Reserve System comprised of banks large and small. So any funds flowing outside the rules would attract their close attention and concern, fearing that if everyone did the same, the entire fund reserve plan would be riddled with holes.
In other words, the Federal Reserve System aims for stability! As long as stability is achieved, it doesn't matter how small your scale is. As long as you don't stir things up or cause trouble, we're good friends!
But the Federal Deposit Insurance Corporation is different. It actually hopes that all the banks joining its program can make a profit and earn money. Because as these banks grow and expand, their scale increases, and the more deposits they attract, the higher the insurance premiums they have to pay to the FDIC each year!
So, it doesn't care whether you follow the rules or not. Whether you mess around or engage in shady activities, for the FDIC, it doesn't matter! Its concern lies more in whether your actions will bankrupt the bank and then they'll have to pay out insurance claims.
As long as there's no bankruptcy, and they don't have to dip into their pockets to compensate depositors, but instead receive stable insurance premiums every year, or even more each year, then you and the FDIC are good friends! They'll even cover for you if you engage in some irregular operations.
Based on the concern over the risk of bank bankruptcy, the FDIC's regulatory focus and direction become clear. There's only one core indicator: the risk-based capital ratio!
In the days when electronic statements hadn't yet appeared, and information and data exchange were relatively primitive and backward, FDIC reviews were typically conducted annually. When the time came, they would send auditors to each bank in the program to count their assets and risk assets.
According to the statistical results, they would categorize each bank into five levels: 10% or more is considered in good asset condition; 8% to 10% is deemed adequately capitalized; 6% to 8% is considered undercapitalized; 2% to 6% is classified as significantly undercapitalized; and 2% or below is extremely undercapitalized!
According to the agreement to join the insurance program, when the risk asset ratio of a savings bank in the program falls below 2%, the Federal Deposit Insurance Corporation has the right to take over the bank directly and carry out bankruptcy restructuring.
Typically, their approach is very straightforward. Where local laws and regulations permit, they'll directly package and sell the deposits and debts of the bank that's extremely undercapitalized to a nearby bank with good or adequate financial status.
This method is extremely common in bank mergers, perhaps the most common method. And it comes with a strong enforcement power. For the original bank owner, the agreement is clear: if you mismanage the bank and let the risk asset ratio fall below 2%, you automatically lose ownership of the bank.
It means that the acquiring party doesn't need to consider the original owner's opinion, and since the FDIC doesn't directly operate banks, they only choose to sell. They even worry that they won't find a "buyer" immediately.
This situation is a perfect match and can be completed without any resistance to the merger of another bank. But this method, at that time, wasn't very common.
The reason for this is the relatively backward information transmission efficiency. It would leave loopholes in FDIC oversight, just like the yin-yang contracts that often burst in China's film and television industry in the future, which were also very common in the American banking circle at that time.
Before the inspection came, it was often the peak period for banks to borrow from each other. These loans would enter the bank's general account as capital injections, counted as bank capital into total assets, in order to increase their risk asset ratio during FDIC inspections. Once they passed the inspection, they would repay them with interest.
Even for small savings banks in general, the most borrowed funds were often to deal with inspections. After playing this trick multiple times, the FDIC isn't stupid.
When they returned to review the statistics every year, they'd take a closer look. On one side, everything looked prosperous. All the banks seemed to have plenty of money - the people seemed wealthy!
On the other side, there would always be those banks that showed good asset conditions previously but suddenly went bankrupt. This drastic contrast was not believable when spoken about.
So, FDIC inspections became even more stringent as a result. Last year's Blake Bank survived because it reduced its loans in the latter half of the year and took back more loans in the form of fixed assets like land, reducing its risk assets. This barely allowed them to pass.
Carter believed that soon, after the FDIC's inspection data were compiled, some task forces would start dealing with bankruptcies in some banks.
And what Carter was waiting for was precisely such an opportunity. If a bank near Douglas collapsed, then his bank, which was relatively close, would be the best candidate for acquisition!
But now we're talking about hidden dangers, so let's not mention opportunities for now.
Merging one's own Blake Bank through the FDIC route would be almost impossible as long as his bank didn't experience extreme undercapitalization.
Especially now, with Julian liquidating gold on his behalf, and large sums of money about to be credited. It would be a breeze to increase the capital ratio.
So, now let's look at the third category, those banks that haven't joined either the Federal Reserve System or the Federal Deposit Insurance Corporation!
This type of bank is becoming less common in the future. But at that time, there were still quite a few, and these fast-growing banks were the ones with the most variables! They were also the ones easiest to catch off guard.