In a move reminiscent of the 1930s, the governor of Rhode Island recently declared a state banking holiday. A short time ago, the Bank of New England became the fourth large bank failure since 1984, estimated to cost the insurance fund more than $1 billion. Rumors persist that the FDIC fund may be insolvent if existing losses at operating but insolvent, or soon-to-be-insolvent, institutions are considered. All of this follows the recent savings and loan debacle, which may cost taxpayers something approaching $200 billion.
In this Chicago Fed Letter I discuss how the current situation in the banking industry has evolved. I then argue that market discipline should have an integral role in any solution to the current problems.