Inside the FDIC

Chapter 11

Too Big to Fail

Compared to the banking and savings-and-loan (S&L) crisis of the 1980s and early 1990s, the 2008 financial crisis was much deeper and broader, encompassing a much wider range of financial institutions and investment vehicles. The FDIC played an important role in limiting the damage, drawing on past experience and institutional memory. However, unlike the earlier crisis, the FDIC was not in the forefront. The Treasury and the Federal Reserve took the lead in handling most of the larger individual failures.

Authority was divided. The FDIC had responsibility for resolving failing commercial banks and S&Ls, those institutions that had federal deposit insurance. The Treasury and the Federal Reserve assumed responsibility for handling other types of failing financial institutions such as investment banks, money market mutual funds, and insurance companies, those financial institutions that did not have federal deposit insurance.

Capabilities differed as well. The FDIC had years of experience with carefully constructed laws and procedures to resolve failing institutions. The Treasury and the Federal Reserve had no such history. They were forced to improvise, relying on bailouts or the bankruptcy process, neither being a good course of action for handling large failing financial institutions.

Much has been written about the 2008 financial crisis, including the many disagreements among the key decision makers. One area of divergent opinions was about when ...