LESSONS FROM THE RHODE-ISLAND BANKING CRISIS

The failure of the Rhode Island Share and Deposit Indemnity Corporatio n (RISDIC), a private insurance fund, and the closure of its 45 remain ing member institutions froze the accounts of 300,000 individuals and 10 percent of all deposits in the state. While the closure of two inst itutions triggered RISDIC's demise, flaws in both design and managemen t had set the stage for failure and are the focus of this article. The authors group RISDIC's problems into three categories: risk concentra tions, control of the insurance fund by those it insured, and RISDIC's inadequate regulatory oversight of members. Concentrations of risks a bounded. Both the fund and the geographic area it covered were small, and member institutions lent heavily in real estate. The fund's failur e to sufficiently reserve against this exposure was particularly probl ematic: RISDIC could not have covered major losses at any one of its 1 0 largest members. RISDIC also neglected standard regulatory practices in supervising member institutions. Adequate deposit insurance rests on several fundamentals, among them diversification, independent super vision, disclosure of weaknesses, and adequate reserves; RISDIC manage d to delay but not avoid the consequences of neglecting these principl es.