Question

Looking at the below article, answer the following:

Why did Congress pass the Federal Deposit Insurance Corporation Improvement Act in 1991? What requirements did the act set for how regulators evaluate a bank’s capital position and how they respond to banks that are undercapitalized?

Coincidentally, the year after the original Basel Accord was agreed upon and the standards began to be adopted by a number of countries over Too by the year 2002- the United States witnessed the largest n since the Great Depression. More than 530 FDIC-insured banks failed in 1989. The concern among policy- makers at the time was about "regulatory forbearance"-in other words, the act of looking the other way when a regulator discovered that a bank might be in jeopardy of collapsing. umber of bank failures Analysts of the period often point out that bank regula- tors were aware of many of the warning signs and the losses from the S&L crisis of the 198os were made worse than they might have been. "The consequent increased pressure to forbear from managers and owners in the industry unchecked by an offsetting increased pressure to facilitate early closure, may have led to changes in favor of such poli- cies in the 198os," write economists Randall Kroszner of the University of Chicago and Philip Strahan of Boston College in a 1996 paper. (Kroszner subsequently served as a Governor at the Federal Reserve Board.) Partly in response to this concern, Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991. It created a set of categories to classify the capitalization of a bank. A bank was "well capitalized" if it had a risk-weighted capital ratio of Io percent or more. It was "adequately capitalized" at 8 percent percent was considered "under- or more. Below 8 pitalized." The law mandated " prompt corrective action" ca by regulators to shut down banks that were considered undercapitalized and failed to meet other criteria. The purpose the government's deposit insurance guarantees by heading off a potential bank collapse while a bank still had a positive, but low, capital ratio. was to minimize the potential cost to taxpayers of