When we as a nation debate the role of government, we often lose sight of why government matters. However, there are many examples of agencies stepping up to help private businesses and local communities in a time of crisis, making a disastrous situation significantly less devastating than it could have been. In this case, the agency in question is the Federal Deposit Insurance Corporation (FDIC).
A recent Government Accountability Office (GAO) report that examined the causes and consequences of small-bank failures during the economic downturn of 2008 emphasizes the crucial role played by the FDIC in reducing the harm done to communities as the crisis unfolded.
The report found that the FDIC, by absorbing a portion of the losses on certain assets of failed banks, prevented many of those banks from shutting down completely. Instead, the FDIC helped healthy banks acquire the failed banks by mitigating the risk of mergers. The report notes, “Bank officials that acquired failed banks confirmed that they would not have purchased them without the FDIC’s shared loss agreements because of uncertainty of the market and valuation of assets.”
The result of the FDIC’s action, however, was not just to help banks buy up their failing counterparts. The report found that the FDIC-aided transition “appears to have mitigated the potentially negative effects of bank failures on communities.” As banks approached failure, they extended less credit to communities and reduced their involvement in philanthropic activities; as acquiring banks absorbed the failing banks, more net credit was offered and charitable activity increased.
The findings of the GAO report show that the consequences of bank failures on communities would have been worse had the FDIC not taken the actions that it did. It is important to keep in mind the importance of public agencies in safeguarding the public interest when markets—and the private sector—fail to do so.