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Projects by Department or Interdivisional Program
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2017-04-07
FDIC and the 1980s bank crisis: Samaritan’s
dilemma leads to emergence of soft budget
constraint in the banking industry
Lindstrom, Kellie
http://hdl.handle.net/10456/42813
All materials in the Allegheny College DSpace Repository are subject to college policies and Title 17
of the U.S. Code.
ECONOMICS 620
Allegheny College
Meadville, Pennsylvania
16335
FDIC and the 1980s bank crisis: Samaritan’s dilemma leads to
emergence of soft budget constraint in the banking industry
Author: Kellie Lindstrom
Date: April 7, 2017
FDIC and the 1980s bank crisis: Samaritan’s dilemma leads to emergence of soft
budget constraint in the banking industry
by
Kellie Lindstrom
Submitted to The Department of Economics
Project Advisor: Professor Simon Bilo
Second Reader: Professor Asuman Baskan
Date: April 7, 2017
I hereby recognize and pledge to fulfill my responsibilities as defined in the Honor Code
and to maintain the integrity of both myself and the College as a whole.
Signature
Name
ii
Acknowledgements
In completing the senior project, I would like to recognize and thank my project advisor,
Professor Simon Bilo, for his guidance throughout the entire process. Overall, I
appreciate both the continuous challenge and the motivation that I received to develop a
research project that culminates the skills and knowledge that I have acquired as an
economics major at Allegheny College.
I would also like to give special thanks to my second reader, Professor Asuman Baskan.
In addition to providing me with feedback to improve my senior project, she has guided
me throughout the years as my academic advisor. My research for this project was
inspired by courses that she taught about financial institutions and monetary economics.
Lastly, I would like to thank my family, friends, and boyfriend who have each supported
my college journey. As a first-generation college student, their support is especially
meaningful. I must give special thanks to my parents for instilling in me the work ethic
that has driven my academic accomplishments, such as this senior project.
iii
Table of Contents
List of Figures …………………………………………………………………………... iv
Abstract …………………………………………………………………………………. v
Chapter 1 – Introduction ………………………………………………………………… 1
Chapter 2 – Literature Review …………………………………………………………... 3
Chapter 3 – Theoretical Analysis ……………………………………………………....... 9
Chapter 4 – Empirical Analysis ………………………………..………………………. 15
Section I – FDIC Operations: 1934 – 1979 ……………………………………. 15
Section II – FDIC Operations: 1980 –1992 …………………………………..... 16
Section III – FDIC Operations: 1993 – Present ………………………………... 28
Chapter 5 – Conclusion…………………………………………………………………. 32
Bibliography……………………………………………………………………………. 34
About the Author ………………………………………………………………………. 37
iv
List of Figures
Figure 3.1 – Samaritan’s Dilemma Payoff Matrix ……………………………………... 14
Figure 4.1 – Rates of Growth of FDIC Bank Failures and Assistance Transactions….... 21
Figure 4.2 – Percent of Failing FDIC Member Banks Receiving Assistance Transactions
per Year ………………………………………………………………………………… 24
Figure 4.3– Average Number of FDIC Bank Failures per Year …………..…….....…... 29
Figure 4.4 – Number of FDIC Member Banks per Year………………………….……. 31
v
Abstract
Throughout the first forty years of the FDIC’s existence, bank failures occurred at
a low and steady rate. Although the FDIC insured the deposits of failed banks during
these years, the FDIC never engaged in an assistance transaction until 1971. The FDIC
began assistance transactions to prevent banks from failing in instances where failures
threatened to result in greater spillover costs into the economy. In the 1980s, banks
began failing at increasing rates each year until they peaked with 531 failures in 1989.
The rate of assistance transactions by the FDIC also increased over this period, however,
they peaked the prior year in 1988 with 238 assistance transactions and dropped to just
three assistance transactions in 1989. In many cases, banks that received assistance went
on to fail in the years shortly after.
Applying the game theoretical framework of the Samaritan’s dilemma explains
how banks exploited the assistance provided by the FDIC and the decision of the FDIC to
provide assistance as they both pursued utility maximization. As the FDIC engaged in
Samaritan-like behavior through assistance transactions, banks began to operate with the
expectation that the FDIC would provide assistance in the case of failure signifying a
moral hazard problem. The changing expectations of banks due to the new possibility of
receiving assistance from the FDIC is the mechanism which led banks to revert their
behavior from being risk averse to risk seeking, resulting in the emergence of the soft
budget constraint and the ensuing bank failures during the 1980s.
Word Count: 8,778
1
Chapter 1 – Introduction
Research on the soft budget constraint syndrome largely surrounds socialist and
transitioning economies. Although the soft budget constraint syndrome takes place in capitalist
economies, there are a lack of empirical studies testing the theory and its implications in
capitalist societies. A shift in government policy to focus on overall economic welfare obtained
through government interventions provides instances for the soft budget constraint theory to be
tested. In particular, the issue of too-big-to-fail firms and banks has become a concern in market
economies like the United States, and handling these institutions in the case of failure imposes a
dilemma for government officials seeking to maintain economic stability in a capitalistic, free
market economy.
Among the government agencies that have provided assistance to banks to prevent them
from failing is the Federal Deposit Insurance Corporation (FDIC). The main function of the
government agency is to protect depositors when bank failures occur, which is funded by
assessment rate payments made by banks that pay for the deposit insurance. According to data
from the 1980 Annual Report of the Federal Deposit Insurance Corporation, only 3.7 percent of
banks in the United States were not insured by the FDIC, and these banks accounted for 5.7
percent of total bank assets (1980). Therefore, FDIC member banks represent the majority of all
banks in the United States.
Assistance transactions by the FDIC occurred infrequently until the 1980s. During the
late 1970s, interest rates were increasing steadily to combat inflation and many banks were
affected by economic downturns in the agriculture, real estate, and energy industries. At this
time, thousands of FDIC insured banks began failing, even after receiving assistance from the
FDIC. Among these failures, the pattern of too-big-to-fail banks began to emerge as a symptom
2
of moral hazard. Although the role of the FDIC is to protect depositors in the case of failing
banks, the emergence of the soft budget constraint reveals that banks made decisions based on
the decisions of the FDIC. Thus, applying the game theoretical model of the Samaritan’s
dilemma uncovers how the soft budget constraint syndrome developed between the FDIC and its
insured banks, stemming from moral hazard, leading to the ensuing bank failures of the 1980s.
3
Chapter 2 – Literature Review
In terms of the 1980s bank failures in the United States, factors other than the FDIC are
cited. For instance, Lynn Seballos and James Thomson’s analysis points to the effects of
regional economic downturns, managerial inefficiencies, and cases of fraud to account for the
failures (1990). George Hanc references the regional economic downturns in agriculture,
energy, and real estate. However, none identify the changing behaviors of the FDIC which
altered bank expectations and softened the budget constraint. Analyzing cases in which the
Samaritan’s dilemma and the soft budget constraint have been observed provides insights for
connecting the two theories in order to explain the bank failures of the 1980s as the FDIC began
providing assistance transactions.
First of all, the soft budget constraint theory was introduced by Janos Kornai in 1979.
Kornai created the theory to explain the nature of socialist economic behaviors which led to
consumer good shortages. In particular, empirical studies have been conducted in Russia,
Bulgaria, China, and Romania (Kornai, Maskin, & Roland, 2003), all of which operated under
socialism. In the case of a socialist economy, the state is the supporting organization which
chooses to subsidize budget constrained organizations to ensure that the public receives social
goods. The motive for bailout arises from the paternalistic nature of the state in socialist
economies.
In capitalist economies, politicians also contribute to the soft budget constraint syndrome,
since politicians are incentivized to ensure that organizations provide social goods in order to
increase the likelihood of becoming re-elected. According to Mehrdad Vehabi, instances of
government intervention result from either the government’s benevolent objectives of providing
social goods, or from a malevolent government, in which case corruption occurs (2001). In
4
either scenario, the soft budget constraint results. Vehabi explains, “Hence, the softness of the
(budget constraint) is a strategic choice of politicians who maximize a particular kind of
“political function”, whereas managers as profit-maximizers are more prone to maintain a (hard
budget constraint)” (2001, p. 187).
According to Lars-Hendrik Roller and Zhentang Zhang, the soft budget constraint
syndrome is more likely to occur when public goods and private goods are bundled together in
high competition markets (2005). Since politicians have incentive to provide public goods, these
firms may receive subsidies to guarantee that the public receives the good. So as competition
increases, which increases the chances for the firm to fail, the firm’s focus shifts toward rentseeking, which entails a change in focus from operating based on efficiency to operating to
ensure that the supporting organization will provide resources that ensure survival.
The soft budget constraint becomes evident from the emergence of inefficiencies.
Eric Maskin notes that rent-seeking tends to occur in monopolistic firms since centralization of
production leads the government to have an interest in protecting these jobs to maximize social
surplus (1996). Hence, the government is willing to provide subsidies. In this case, instead of
maximizing profits by investing in the company to reduce marginal costs, the firm chooses to
earn these profits by operating inefficiently and earning the subsidy (Maskin, 1996).
Deadweight loss occurs from the government’s financing of the subsidy, and a misallocation of
resources results from the firm’s lack of investment (Maskin, 1996). Other inefficiencies include
increased overhead costs, increased labor costs, and an overall lack of innovation by the firm.
In a study by Per Pettersson-Lidbom, the soft budget constraint theory was tested on
Swedish local governments from 1979 to 1992. He empirically determined that the soft budget
constraint was evident in the fact that local governments expecting future assistance from the
5
central government’s discretionary grant program tended to increase debt by about 20 percent
(2010). According to Pettersson-Lidbom, the discretionary grant program administered by the
central government to local governments led to a soft budget constraint since the lack of a
formula based policy inhibited the central government to pre-commit to a policy rule (2010).
Without a set of standards, the local governments are not restricted in their requests for
assistance.
Supporting organizations tend to perform the bailout because a cost-benefit analysis
shows that the bailout may actually seem less costly than compensating for the public goods that
would be lost by allowing the firm to fail. Therefore, the greater the value of the public good
provided by the firm, the more likely the firm is to be subsidized. Furthermore, the government
may include the impact of compensating for unemployment, welfare, and other costs associated
with maintaining economic well-being. Thus, the too-big-to-fail scenario emerges from the soft
budget constraint syndrome, since the cost of a bailout may be cheaper than failure for larger
firms than smaller firms when it comes to compensating for each of these.
However, not all theorists of the soft budget constraint agree with the too-big-to-fail
relationship to the soft budget constraint theory. In investigating the relationship between
population size and willingness of local governments to induce bailouts in Argentina, Colombia,
and Costa Rica, E. Crivelli and K. Staal found a negative correlation, indicating that smaller
local governments were more inclined to induce bailouts (2013). This finding follows from the
fact that bailing out a small local government is less costly than bailing out a large local
government. Although it may be true in some cases that bailing out a small bank is less costly
than bailing out a large bank, a key difference exists in the fact that banks operating under
capitalism are ultimately allowed to fail for the sake of weeding out the weaker banks, but local
6
governments are non-profit enterprises meant to serve the public, rather than to compete with
each other. Therefore, the emergence of the soft budget constraint among banks is
fundamentally different than the soft budget constraint existing among political systems, since
larger banks are more likely to have an impact on affecting economic stability than smaller
banks. Given the spillover effects that a failed bank can have in not only local, but even state
and national economies, banks tend to be highly susceptible to the soft budget constraint. For
instance, Kornai, Maskin, and Gérard Roland explain, “If a big enterprise goes under, its unpaid
bills may force its suppliers down too, starting a chain reaction of bankruptcies. These failures
could cause mass redundancies and a fall in aggregate demand, possibly leading to recession”
(2003, p. 1,099). Therefore, in order to prevent widespread impact, the government is
incentivized to bailout banks, and the larger the bank is, the more likely it is to be saved due to
the too-big-to-fail dilemma.
Clearly, a moral hazard problem exists when firms are aware of the impact they have on
disrupting the economy. Moral hazard results when banks use this knowledge to take on riskier
investments in order to reap the benefits of higher returns without the risk of actually shutting
down due to failure. Julan Du and David Li argue that as capitalistic nations become
increasingly focused on social-welfare, the budget constraint becomes softer in response to moral
hazard, which then requires the need for regulations to combat the moral hazard problem (2007).
Thus, deregulation in the banking industry during the 1980s in combination with the
government’s concern for public welfare creates an environment subject to the soft budget
constraint.
The changes in behavior by the banks due to the problem of moral hazard is
representative of the strategic exploitation by parasites which occurs in the Samaritan’s dilemma.
7
In 1975, the Samaritan’s dilemma was introduced by economist James M. Buchanan. The
Samaritan’s dilemma uses a game theoretical approach to explain how charitable acts can
actually lead to inefficiency through exploitation of the charity. As those receiving the charitable
good realize that the assistance is possible, they may rely on the charity rather than changing
their behaviors such that the charity is no longer needed, resulting in moral hazard. This reliance
occurs as long as the parasite expects that the charity will continue, which signifies the moral
hazard problem, since the Samaritan is unaware of the parasite’s intentional reliance.
For example, a study by Stephen Coate applied the Samaritan’s dilemma to demonstrate
that poor people are incentivized to under-insure themselves since they know that receiving
charity from rich people is an option (1995). In the model, the government first provides
unconditional transfers on behalf of the rich people, since accommodating the poor provides
greater utility to everyone – even though this requires the rich to make payments to the
government, the rich are better off knowing that they are contributing in an altruistic and
charitable fashion. However, the poor people will still choose not to fully insure since the rich
people will still provide private charity in the case that the poor person experiences a hardship
and is not fully insured. Overall, the dilemma arises because of the inefficient distribution of
transfers; the rich must pay more through both the government transfer and the private charity,
and the poor people put themselves at risk by choosing to under-insure and rely on private
charity. Coate argues that the inefficiencies could be avoided if the government requires that the
poor have adequate insurance in order to receive government transfers (1995).
Furthermore, moral hazard has been found to result in deposit insurance systems, despite
their function to protect depositors and to prevent bank runs. Before the FDIC was established in
1934, several states created their own systems of deposit insurance to issue to banks. A study by
8
David Wheelock and Paul Wilson examined bank failures which took place in Kansas during the
period from 1910 to 1928, and they tested to see if banks’ membership in the state deposit
insurance system correlated with chance of failure. Their findings revealed that member banks
of the state deposit insurance system were more likely to fail during this period than non-member
banks, since insured banks tended to hold higher-risk portfolios (Wheelock & Wilson, 1995).
Wheelock and Wilson found evidence of moral hazard since banks reduced their capital-to-asset
ratios after gaining membership into the deposit insurance system (1995). This signifies that
deposit insurance incentivizes banks to become risk seeking, when previously they were risk
averse. Overall, Wheelock and Wilson compare the banking failures in Kansas to the banking
failures of the 1980s in order to analyze the role of deposit insurance in contributing to bank
failures.
Kornai, Maskin, and Roland confess that a critical study of the soft budget constraint in
modern capitalism would be a significant contribution to the literature (2003). Therefore, this
study will combine the theories of the soft budget constraint and the Samaritan’s dilemma to
provide a critical analysis of how the assistance transactions provided by the FDIC to failing
banks during the 1980s led to widespread failures as both the FDIC and banks were pursuing
utility maximization. In particular, moral hazard resulted and altered bank behaviors from being
risk averse to risk seeking given the new possibility of assistance from the FDIC in the case of
failure.
9
Chapter 3 – Theoretical Analysis
Indicators of the soft budget constraint syndrome include the presence of softening
instruments, such as subsidies of the state, soft taxation, soft bank credit and excess trade credit,
expectations of rescue, survival of financially troubled firms, and increased frequencies of
bankruptcies, liquidations, and bailouts of firms. Researchers of the soft budget constraint are
able to detect these indicators, but the mechanism which leads to the occurrence of these
indicators is unclear. In particular, the mechanism involves instruments of softening at play that
create a moral hazard issue. Due to the moral hazard, expectations of rescue formulate, which
present new opportunities for utility maximization. This underlying mechanism of the soft
budget constraint can be explained through the application of the Samaritan’s dilemma.
Combining the theories of the soft budget constraint and the Samaritan’s dilemma provides a
framework for understanding how both budget-constrained organizations and supporting
organizations perpetuate a soft budget constraint in order for each to pursue utility maximization.
First of all, the soft budget constraint syndrome always contains the following
components: one or more supporting organizations and one or more budget-constrained
organizations, in which case the supporting organizations will bailout the failing budgetconstrained organizations when they incur deficits (Kornai, Maskin & Roland, 2003). As
mentioned, the supporting organizations use an instrument of softening to assist the budgetconstrained organizations.
However, it is important to note that the soft budget constraint theory does not apply in
every bailout situation between a supporting organization and budget-constrained organization.
The soft budget constraint syndrome occurs when an expectation for being rescued develops
among the budget-constrained organizations (Kornai, Maskin, & Roland, 2003). The
10
expectation of bailout is critical in applying the soft budget constraint theory since the budgetconstrained firm makes ex ante decisions based on this expectation. In the case of a soft budget
constraint, firms will continue to behave with the expectation of bailout, even if the supporting
organization announces ex ante that bailouts will not occur. The behavior does not change since
the supporting organizations suffer from a commitment credibility problem (Kornai, Maskin, &
Roland, 2003). That is, the supporting organization fails to commit to abiding by a set of clearly
defined standards for providing aid, and instead provides aid in a discretionary fashion. The
discretionary nature of providing assistance allows the budget-constrained organization to
continue requesting assistance, which influences the supporting organization to continue
providing aid.
The commitment credibility problem and the forming of expectations of assistance results
when budget constrained organizations witness others in the industry receiving assistance in
situations where the organization would have failed otherwise. Since budget constrained
organizations industry wide expect assistance from the supporting organization, the industry
suffers from inefficiency as banks operate with the knowledge that assistance is possible. The
assistance provided by the supporting organization allows the budget constrained firms to
achieve utility maximization beyond the budget constraint. However, since this utility
maximizing point lies beyond the budget constraint, providing the assistance becomes
unsustainable, and thus, widespread failure results in bankruptcies, liquidations, and bailouts.
Conversely, the presence of a hard budget constraint causes budget-constrained organizations to
operate more efficiently as there is no expectation of bailout following failure.
The element of expectation in the soft budget constraint theory is reflective of a game
occurring between the parties, since the decisions made by the supporting organizations affect
11
the decisions made by the budget-constrained organizations. Therefore, the game theoretical
framework of the Samaritan’s dilemma explains the mechanism of behaviors that lead to the soft
budget constraint. The Samaritan’s dilemma arises as a game between two players, with the first
player deemed the Samaritan and the second player deemed the parasite, because the Samaritan
provides some kind of assistance to the parasite.
Buchanan theorizes that the Samaritan’s dilemma emerges as a consequence of
increasing wealth and economic affluence, which began in Western societies in the twentieth
century (1975). Increased wealth provides a greater number of options, in particular, “soft
options”, for maximizing utility. These “soft options” involve a preference for short-run utility
maximization; however, choosing short-run utility maximization jeopardizes utility
maximization in the long-run since there is a lack of goal congruence between the short-run and
the long-run. The soft options lead to short-run utility maximization since the options are not
sustainable for the long-run.
Relating to the soft budget constraint theory, the Samaritan would be the supporting
organization, and the parasite would be the budget-constrained organization. The decisions
made by the parasite are dependent upon the decisions made by the Samaritan. Within this game
setting, the budget constraint will be hard if the Samaritan acknowledges the game and behaves
strategically in order to control or influence the parasite’s decision making to reach the desired
outcomes. However, if the Samaritan behaves pragmatically instead, the parasite can behave
strategically in order to exploit the Samaritan, which results in a soft budget constraint. The
Samaritan may not begin to behave strategically until after it has already been exploited.
The exploitation by the parasite occurs as a result of moral hazard. The presence of
moral hazard indicates that the parasite is aware of the game setting in place with the Samaritan.
12
Since the Samaritan’s utility maximization is dependent upon the parasite continuing to exist, the
parasite can behave with the knowledge that the Samaritan will provide assistance to ensure its
survival. In the case of the banking failures, the moral hazard is representative of the too-big-to
fail dilemma. Since economic stability is the goal of the Samaritan, which is the FDIC, then the
FDIC is incentivized to protect larger banks that have a greater impact on disrupting the
economy compared to smaller banks. Therefore, moral hazard affects larger banks in such a way
that they are more likely to exploit the Samaritan.
The exploitation occurs in the form of the parasite behaving in a risk seeking manner
rather than risk aversely. Prior to the expectation of assistance from the Samaritan, the parasite
avoided risk seeking since greater risk poses the threat of failure. Since the parasite expects the
Samaritan to ensure its survival, the risk seeking nature develops and the increased utility
emerges. The parasite realizes that greater payoffs are possible and that the Samaritan will
provide protection from the potential risk of failure.
For both the Samaritan and the parasite, each is behaving in the game to maximize their
own utility. However, the increased utility maximization offered in the short-run due to a soft
budget constraint inhibits each player from reaching maximum utility in the long-run; this is the
dilemma that results in the Samaritan’s dilemma. For example, in order for the Samaritan to
behave strategically, the Samaritan must gain credibility, which can be obtained by setting and
abiding by rules and standards for providing the assistance to the parasite. Even though not
providing the assistance may have undesirable consequences for the Samaritan, which
diminishes the Samaritan’s utility in the short-run, the Samaritan must remain strategic to
prevent exploitation by the parasite. If the Samaritan loses credibility, then the exploitation
occurs, and the Samaritan may not be able to continue providing assistance in the long-run,
13
leading to decreased utility for the Samaritan. Similarly, the parasite compromises long-run
utility by purposefully exposing itself to greater risk that could lead to failure, and thus, long-run
utility maximization is no longer possible.
For example, Buchanan theorizes that the parasite may continue to exploit the Samaritan,
even if it results in the parasite’s own demise. Buchanan argues, “Unless an equilibrium is
established which imposes self-selected limits on Samaritan-like behavior, the rush toward
species destruction may accelerate rather than diminish. The limit that is defined by existing
utility functions may lie beyond that which is required for maintaining viable social order”
(1975, p. 84). Therefore, if the Samaritan allows the parasite to maximize utility beyond the
budget constraint, then economic collapse will result since this would be unsustainable.
The matrix in Figure 1 reveals how the FDIC member banks acted strategically in the
game to maximize utility while the FDIC was behaving pragmatically. As shown, quadrant I is
the utility maximizing choice for the banks since it allows them to engage in risk seeking –
which leads to greater payoffs – with the protection of receiving potential assistance from the
FDIC. However, the FDIC gains maximum utility in quadrant II, because the FDIC wants banks
to be risk averse, while also offering assistance transactions to maintain economic stability. If
the FDIC were to instead choose to not provide assistance, the banks would find greater utility
by behaving risk aversely, as shown in quadrant IV compared to quadrant III; this results because
banks realize that assistance is not possible, so the banks must be risk averse to ensure survival.
Since the FDIC chooses to provide assistance to banks, exploitation occurs because the moral
hazard leads banks to alter their behaviors from behaving risk aversely to risk seeking, which
represents the emergence of the soft budget constraint.
14
Figure 3.1
15
Chapter 4 – Empirical Analysis
During the 1980s savings and loans crisis, the FDIC operated as a supporting
organization and Samaritan to the budget-constrained, and parasitic, FDIC member banks.
Although the primary function of the FDIC is to provide insurance to depositors in the case of a
bank failure, the FDIC also engages in assistance transactions, which allow banks to continue
operating in cases where they would otherwise fail. Assistance transactions were uncommon
until the 1980s. The regulatory attitudes of the FDIC toward public policy involved the
protection of banks for the sake of minimizing the spillover economic costs. The FDIC requires
that member banks pay an assessment rate, however, evidence shows that this rate was set too
low to reflect the value of the risks it protected through insurance. Therefore, the Samaritan
objectives of the FDIC contributed to policy decisions that perpetuated a soft budget constraint
among FDIC member banks, and consequently, made them more susceptible to failure during the
1980s.
Section I – FDIC Operations: 1934-1979
Since the founding of the FDIC in 1934, there have only been two years that have had
zero FDIC member bank failures, and these years were 2005 and 2006. Thus, the FDIC is
accustomed to insuring the deposits of failing banks. Prior to 1971, banks were strictly resolved
in just one of two ways; either a payout transaction occurred, in which case the FDIC paid
depositors directly, or a purchase and assumption transaction resulted, where an acquirer
purchased either some, or all, of the deposits and assets from the failed bank. In both of these
situations, the failed bank’s charter is terminated, and the bank ceases to operate. Since the
FDIC had never engaged in assistance transactions, banks had no expectation of bailout in the
16
case of failure. Furthermore, since the FDIC did not provide assistance, the budget constraint is
expected to be hard in the banking industry during this time period prior to 1980.
Referring to the matrix in Figure 3.1 from the theoretical section, the banks would view
their possible payoffs to be those in either quadrant III or quadrant IV. Those which behaved in
a risk averse manner would be rewarded with greater payoffs in quadrant IV. These payoffs
include continued survival for the bank. Banks that were risk seeking would receive the lower
payoffs in quadrant III and faced failure with no possible assistance.
Intervention by the FDIC to save failing banks was unheard of until the year 1971. In
1971, 1972, 1976, and 1977, the FDIC performed one assistance transaction in each of these
years. The FDIC lists two ways in which they provide assistance; either the FDIC provides
assistance to the acquirer of a failed institution, or the FDIC conducts an open bank assistance
transaction. Open bank assistance involves the FDIC aiding through either a direct loan, an
assisted merger, or through the purchase of assets of the failing bank. Assistance transactions
allow the charter of the failing bank to survive.
Section II – FDIC Operations: 1980-1992
The FDIC again engaged in assistance transactions in 1980, but this time 12 assistance
transactions took place. Given the fact that assistance transactions were unprecedented, this
intervention provided the implication that bank survival was possible when failure was
previously the only option. Assistance transactions continued to occur annually from 1980 to
1992, revealing a clear choice by the FDIC to engage in assistance transactions as an option for
resolving failing banks. Therefore, banks formed the expectation that the FDIC would provide
assistance in the case of bank failure. The Samaritan-like behavior of the FDIC to provide
17
assistance is the mechanism which leads to the softening of the budget constraint and alters the
expectations of banks such that the payoffs in quadrants I and II now are possible in the matrix in
Figure 3.1.
Newspaper headlines alerted banks of the ways that the FDIC was changing its behavior
to begin providing assistance to troubled banks. Beginning in 1980, the FDIC made headlines
for providing assistance to the First Pennsylvania Bank, as cited in the article “First Penn to
Receive Rescue Aid” by the New York Times. The article mentions the fact that the bank is the
twenty third largest bank in the nation and the largest bank, at the time, to ever be assisted by the
FDIC; the article also cites that FDIC chairman, Irvine H. Sprague, said, “This assistance
package represents a unique cooperative effort between the FDIC and the banking industry. It is
designed to serve the public interest by enabling the twenty third largest bank to maintain its
service to the community and facilitate the bank’s early return to full financial health” (1980, p.
D12).
Later in 1981, the New York Times reported that the New York State Banking
Department sought changes to the State Legislature, specifically to allow the FDIC to inject
liquidity into failing savings banks. The article notes that the New York State Superintendent of
banks, Muriel Siebert, “believed that the Federal Deposit Insurance Corporation, which insures
savings bank deposits, would be willing and able to inject new funds into a savings bank that had
run out of capital” (Bennett, 1981, p. D12). In the bill, Siebert also proposed giving permission
to commercial banks to purchase some branches of failing savings banks to absorb their losses.
The bill was passed a week later. Again in 1981, the New York Times published an article titled
“Busy Times at the FDIC”, which highlighted the unprecedented assistance transactions that the
FDIC was making to ensure the survival of savings banks. The FDIC chairman at this time,
18
William M. Isaac, was quoted saying, “Depositors should be very reassured by the transactions
that we have put together so far in the savings bank industry. We have both the financial and
personnel resources to deal with any problem” (Bennett, 1981, p. D26). Surely, this statement by
the FDIC chairman signaled to banks that the FDIC had the resources available – and the
economic incentive – to provide bailouts.
First of all, the existence of the FDIC creates a tradeoff between stability and moral
hazard (Hanc, 1997). Depositors have no incentive to monitor bank behavior since the FDIC
protects deposits in the case of failure. Therefore, FDIC member banks can take advantage of
this lack of monitoring by depositors to take on greater risks than non-member FDIC banks that
rely on acting conservatively to ensure the safety of their customers’ deposits. In regards to the
regulatory beliefs of the FDIC during the 1980s, Hanc notes:
At various times and for various reasons, regulators generally concluded that good public
policy required that big banks in trouble be shielded from the full impact of market forces
and that their uninsured depositors be protected. This policy contributed to the overall
record of stability achieved by the deposit insurance system in the 1980s. At the same
time, however, it weakened any incentive for uninsured depositors to monitor and restrain
risk taking by the banks (1997, p. 42).
This revelation shows the moral hazard issue which exists in the case of large banks. The
regulators’ public policy views stemmed from the belief that the failure of large banks would
cause greater economic disturbances. Therefore, the FDIC was prompted to begin performing
assistance transactions while giving particular attention to serving large banks, resulting in the
emergence of too-big-to-fail banks during the 1980s. Frederic Mishkin argues that the moral
hazard from the too-big-to-fail policy encouraged banks to misallocate resources since their
19
focus was set on expanding their size beyond that which was socially optimal, rather than
focusing on innovation (2006), which is an indicator of the soft budget constraint.
Given the importance placed on the sizes of the banks failing, expectation for bailout was
certainly influenced by bank size. Mishkin notes that following the too-big-to-fail policy, which
was announced after the first large bank, Continental Illinois, experienced bailout in 1984, the
eleven largest banks experienced higher returns compared to smaller banks, and mergers among
large banks increased market value for shareholders, but the mergers of small banks did not have
this same effect (2006). This evidence suggests that shareholders were not deterred from
investing in large banks at risk for failure because there was confidence that the FDIC would
provide assistance to the large banks. Protecting banks based on size supports Maskin’s model
of the soft budget constraint resulting from the centralization of production in monopolies;
although the banks do not classify as monopolies, the failure of large banks poses a threat to not
only the unemployment of the banks’ employees, but also the unemployment of the banks’
customers that would be affected from the failure. Thus, the FDIC was incentivized as a
Samaritan to protect these banks for the sake of economic stability.
Clearly, the assistance transactions increased the softness of the budget constraint since
they perpetuated the behavior of inefficient banks. For example, a popular form of assistance the
FDIC provided was assisted merger transactions among failing banks. In doing so, the FDIC
created larger banks, which actually increased the likelihood for the bank to be rescued again in
the future, due to the public policy beliefs regarding large banks. Furthermore, merging the
failing bank with a stronger bank ultimately weakened the stronger bank as it had to assume
responsibility for the weak bank’s poor-performing assets; however, to make up for this, the
FDIC injected funds into the newly merged bank, which gave incentive for the stronger banks to
20
bid on these higher risk banks. Over the period from 1981 to 1985, the FDIC conducted assisted
mergers among seventeen mutual savings banks, which held $24 billion in assets (Hanc, 1997).
The popularity of assisted mergers stems from the increased utility possible for both the
FDIC and the banks through this assistance transaction. For instance, the failing bank benefits
since it is allowed to continue operating, and it becomes a stronger bank as a result of the merger.
Both banks participating in the assisted merger benefit from the liquidity injection from the
FDIC. Lastly, the FDIC prefers the assisted merger because it is a low cost option to resolving
the failing bank, compared to paying depositors if the FDIC let the bank fail instead.
Other forms of assistance by the FDIC occurred through open bank assistance
transactions. According to S. Forbush and M. Spaid, bias is evident toward the preservation of
large banks through open bank assistance transactions, since the average asset size of banks that
received open bank assistance from 1980 through 1994 was $620 million (1998). In total, open
bank assistance only accounted for eight percent of all assistance transactions, however, open
bank assistance transactions constituted over 24 percent of the total $302.6 billion of bank assets
from the failed and assisted banks combined (Forbush & Spaid, 1998).
Evidence that the FDIC perpetuated the softness of the budget constraint stems from the
fact that several of the banks which received assistance later went on to fail within just a few
years. For example, an Alaskan institution only survived fifteen months following assistance,
and the Texas bank, BancTexas, survived just two years after assistance; these banks represented
resolution costs of $77.4 million and $64.6 million, respectively (Forbush & Spaid, 1998). This
finding is similar to Pettersson-Lidbom’s findings in his study of Swedish local governments,
since the local governments which received the highest number of discretionary grants also
accumulated the most debt even after the program declared a no bailout policy in 1992,
21
indicating that these local governments continued to exhibit poor fiscal policies with an
expectation of bailout (2010). In both of these cases of the soft budget constraint, the supporting
organizations failed to correct the behaviors of the budget-constrained organizations which were
causing failures.
The expectation for bailout by banks was also influenced by the increasing number of
assistance transactions occurring over the period. Figure 4.1 shows the growth rate from year to
year for both assistance transactions and bank failures since the FDIC has been in place. The
FDIC gained authorization from Congress to implement the open bank assistance policy in 1950,
however, Figure 4.1 reveals that few transactions took place until 1980. From 1980 to 1988, the
rate of assistance transactions increased; in 1988, the most assistance transactions by the FDIC
Figure 4.1
Rates of Growth of FDIC Bank Failures and
Assistance Transactions
625
125
25
5
1934
1938
1942
1946
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
1
Fail
Source: fdic.gov
Assist
22
occurred with 238 banks receiving assistance. It is important to note that the number of
assistance transactions actually exceeded the number of bank failures in the years of 1980, 1981,
1982, and 1988.
Coinciding with the growth in assistance transactions is the broadening of the FDIC
policy concerning open bank assistance (Forbush & Spaid, 1998). In 1950, the policy gave the
authorization for open bank assistance based on the essentiality of the institution’s survival,
however, the determinants of essentiality were not defined, and Congress allowed this
determination to be made by the FDIC board’s opinion (Forbush & Spaid, 1998). In 1982, the
Garn–St Germain Depository Institutions Act was passed which eliminated the need for the
FDIC to give any evidence of an institution’s essentiality in order to provide open bank
assistance, except in the case that the cost of open bank assistance exceeded the cost of failure
(Forbush & Spaid, 1998). As noted in the theoretical section, discretionary standards tend to
result in more transfers occurring from the Samaritan to the parasite compared to when clearly
defined rules are in place. This happens because the conditions for receiving aid are not as
limited when the standards are discretionary.
The discretionary nature of the FDIC led to concerns about justice surrounding the
actions of the organization. Since the process of providing assistance to banks was
unprecedented, the FDIC seemed to have unfettered power in determining which banks would be
allowed to survive. A New York Times article published in 1991 discusses how the FDIC
accepted the bid by Fleet/Norstar Financial Group to acquire the failed Bank of New England,
even though BankAmerica Corporation offered the highest bid, and the only explanation
provided was simply that the FDIC believed that the merger with Fleet would be the least costly
without any supporting information (Gerth, 1991). The article further questioned the federal
23
checks and balances in place for the FDIC’s actions, considering the lack of oversight by
Congress.
Another issue of justice arises since the FDIC may assume differing roles as either a
corporate entity or a receivership entity. In the situation of a member bank’s insolvency, the
FDIC holds the role of receiver of the bank, which gives the FDIC the right to recover damages
from the bank’s management and stockholders for contributing to the bank’s failure. In the role
of receiver, the FDIC is obligated to first pay depositors, then secured creditors. After this, the
FDIC may pay out administrative expenses and liabilities. Then with any final funds, unsecured
creditors and shareholders may receive funds. As a corporate entity, the FDIC may pursue
lawsuits, which can impact the FDIC’s role as receiver. This problem of justice is described by
Christian Johnson’s analysis in how the FDIC responded to the failure of Superior Bank in 2001,
since the FDIC showed preferential treatment to the shareholders over the creditors in this failure
by choosing to administer its corporate capacity rather than its role as receiver authority (2005).
Johnson argues, “Given that agencies will play increasingly important roles in the administration
of justice to those they regulate, agencies must seriously ask what is just and fair for all involved
in regulation, instead of what will simply maximize their power or potential economic recovery”
(2005, p. 494). During the 1980s, the FDIC’s focus was clearly on maintaining economic
stability rather than ensuring justice, since the FDIC engaged in assistance transactions for the
sake of minimizing spillover economic costs. In consequence, shareholders were saved from
suffering losses when the FDIC provided assistance, which suggests the problem of justice
surrounding the FDIC’s actions during the 1980s.
Figure 4.2 depicts the percent of failing banks which received FDIC assistance
transactions out of the total number of assisted and failed banks since assistance transactions
24
began in 1971. Both Figure 4.1 and Figure 4.2 reveal the pattern of assistance emerging by the
FDIC. In 1972 and during the period from 1980 to 1983, over half of the total number of failing
banks received assistance transactions from the FDIC. This increase coincides with the FDIC’s
broadening of the open bank assistance policy. Then from 1984 to 1987, the number of
assistance transactions diminishes to less than 25 percent per year. This decrease in transactions
reflects the FDIC’s decision to revise the Garn–St Germain Depository Institutions Act in order
to restrict open bank assistance to only occur if it were considered less costly than alternative
choices, specifically liquidation, and as long as the transaction did not benefit any of the bank’s
shareholders, subordinated debt holders, or holding companies (Forbush & Spaid, 1998).
Despite this policy change, which took effect in 1986, the increasing rate of bank failures,
shown in Figure 4.1, reveals the commitment credibility problem of the FDIC; although the
FDIC revised the policy ex ante with the goal of reducing the number of assistances to banks, the
Figure 4.2
Source: fdic.gov
25
FDIC failed to maintain this commitment ex post as banks continued to fail at an increasing rate.
Hence, the expectations of banks to receive assistance were unaltered since the FDIC’s policy
change was ineffective in changing bank behaviors, and the FDIC again provided assistance to
50 percent of failing institutions in 1988.
Another indicator of the softening of the budget constraint is the passing of the
Depository Institutions Deregulation and Monetary Control Act of 1980; the act increased the
deposit insurance limit from $40,000 to $100,000 (Hanc, 1997). This increase further reduced
incentive for depositors to monitor banks and signaled to banks an increase in the FDIC’s
capacity. In real terms, Thomas Hogan and William Luther calculate that the coverage in deposit
insurance increased by 282 percent from 1965 to 1980 (2014). Therefore, this increase in
deposit insurance coverage was not in response to inflationary changes; the FDIC was engaging
in behaviors that altered bank behaviors and expectations leading up to the 1980s crisis.
Further evidence of the soft budget constraint follows from the increased risks banks
were assuming. As noted, regional economic downturns have been attributed to banking
failures, however, acts passed regarding the FDIC influenced the increased risks banks had taken
within these regional markets. For instance, the Garn–St Germain Depository Institutions Act of
1982 eased lending in real estate by removing statutory restrictions and relaxing loans-to-one
borrower limits (Hanc, 1997). The Garn-St Germain Depository Institutions Act also extended
real estate lending authority to savings banks and gave thrift institutions the ability to invest in
commercial loans (Hanc, 1997). Thus, the act contributed to the increased competitive climate
which encouraged banks to lend rapidly into this market, even though real estate is a historically
risky market. Failed banks tended to have increased loans-to-assets ratios, and in particular,
increased commercial real estate loans-to-assets ratios (Hanc, 1997); this signifies that these
26
banks were exposing themselves to increased risk since loans accounted for a higher proportion
of total assets. If borrowers were unable to payback these loans, then the bank’s total assets
would decline significantly. Risks were also born from relaxed underwriting standards;
according to Hanc, lenders often bore all of the risks while borrowers had no equity at stake
(1997). Hanc also discusses the views of FDIC regulators during the 1980s in terms of the
increased risk taking by banks:
Regulators apparently believed that as long as risky behavior was profitable, they had
limited leverage to restrain such behavior. Examiners interviewed for this study stated
that as long as the banks were profitable, it was difficult to persuade bank managements
or their own superiors in the regulatory agencies that problems could lie ahead. When
risky behavior resulted in actual losses, regulators were more effective, but often by that
time the damage had been done (1997, p. 40).
The deteriorated loan quality of failing banks resulted from managers seeking to take
advantage of the soft budget constraint. One key factor during this time was the lack of any
criminal penalties for managers of failed banks, especially considering the evidence of fraud that
was occurring (Seballos & Thomson, 1990). Softening in the financial industry is evident when
comparing the reactions from the Great Depression to the 1980s crisis, as Kornai, Maskin, and
Roland note,
In the early days of capitalism, the budget constraint was for the most part hard. Think,
for example, of debtors' prisons, of borrowers compelled to auction off their personal
property, and of businessmen for whom the threat of bankruptcy led to suicide. Since
that time, the capitalist budget constraint has gradually softened. The introduction of the
principle of limited liability in corporate finance, less draconian bankruptcy regulations,
27
and modern forms of separation and interweaving of ownership and management have all
served to protect managers from the adverse consequences of their actions (2003, p.
1,131).
A prime example stems from the failure of Penn Square Bank in Oklahoma City in 1982. The
financial institution had engaged in risky lending practices primarily to the gas and oil industries,
which allowed the bank to grow from $62 million in assets in 1977 to $520 million in assets by
the time of failure in 1982 (Federal Deposit Insurance Corporation, 1998). Although the FDIC
decided to liquidate the failed bank, it was uncovered that officials at the bank had been referred
to the Justice Department as early as 1978 for misapplication of funds, but had not faced any
criminal penalties until the bank sparked national attention as the largest bank failure in 1982
with fraudulent bank transactions totaling $70 million (Gerth, 1982). The bank’s former senior
vice president and chief of energy lending, William Patterson, was charged with three counts of
misapplication of funds and eight counts of wire fraud; Patterson plead guilty to aiding and
abetting to one count of misapplication of funds and was sentenced to just two years in prison
(Gorman, 1988). However, Patterson was sentenced six years after the failure in 1988, so during
most of the 1980s, bank managers had not witnessed criminal charges as a real consequence to
irresponsible or fraudulent bank management.
The expectation of assistance from the FDIC may have influenced managers in the
banking industry to transfer their own accountability to the FDIC in preventing the banks from
failing. In the case of assistance, the FDIC generally replaced the senior management of the
bank (Forbush & Spaid, 1998). Therefore, although the management did lose their jobs, the lack
of criminal charges led to greater potential benefits than costs. Surely, some managers were able
to tap into the benefits since not every bank failed.
28
Leading up to the crisis, a study by Hogan and Luther reveals that the rate was set below
the average fairest rate at just $0.04 per $100 of insured deposits from 1950 through 1980
(2016). Once the failures began in 1980, the FDIC began increasing the assessment rate,
however, it was too late; by 1990, the deposit insurance fund was completely depleted (Hogan &
Luther, 2016). The FDIC was still faced with paying out funds to depositors, so with the
depleted deposit insurance fund, the FDIC turned to taxpayer funds to make payments to
depositors. Over $150 billion of taxpayer funds were used to pay depositors (Curry & Shibut,
2000), which clearly demonstrates that the FDIC’s assessment rate system failed to hold banks
accountable for their risky behaviors. Also, the fact that taxpayer funds were used to bailout
banks is an indicator of a soft budget constraint; Kornai, Maskin, and Roland note that
government contributions are instruments of softening (2003). If the FDIC had been committed
to only using funds generated from the assessment rate fees, then a hard budget constraint and
higher assessment rates would have been in place.
Section III – FDIC Operations: 1992 - Present
Following 1992, the number of assistance transactions fell to zero. The FDIC did not
engage in any assistance transactions for the next 15 years, until 2008. According to Forbush
and Spaid’s analysis of the FDIC’s history of open bank assistance, several acts took place in the
early 1990s to restrict the FDIC’s use of open bank assistance, including the Federal Deposit
Insurance Corporation Improvement Act (FDICIA) of 1991 and the Resolution Trust
Corporation Completion Act (RTCCA) of 1993 (1998). The FDICIA mandates that open bank
assistance can only occur if it is the least costly option and following an examination of the
bank’s management to ensure competency and that no fraud has occurred. The FDICIA also
29
improved the regulatory function of the FDIC by mandating that the FDIC conduct annual
examinations and audits, monitor capital ratios of banks, prohibit the use of brokered deposits by
undercapitalized institutions, restrict state-bank activities, and issue a risk-based deposit
insurance assessment system (Hanc, 1997). The RTCCA restricts the FDIC from using the
insurance fund to benefit the shareholders of a failing bank (Forbush & Spaid, 1998). The FDIC
also decided to change its assessment rate policy in order to prevent the fund from becoming
depleted again. The provisions included an adjustment to the assessment rate so that it always
reflects 1.25 percent of total insured deposits and the adoption of a tiered rate-setting system
(Hogan & Luther, 2016). The tiered rate-setting system helps to prevent moral hazard since it
charges a higher assessment rate to banks holding riskier assets making banks less inclined to be
risk seeking.
Figure 4.3
Source: fdic.gov
30
Since tighter regulations restricted the FDIC from engaging in assistance transactions,
and the FDIC also did not provide any assistance from 1993 to 2007, it seems that banks no
longer expected that FDIC assistance was an option to prevent bank failure. In accordance with
the theory, the number of bank failures declined as banks no longer perceived that assistance
from the FDIC was an option. Figure 4.3 shows the average number of bank failures per year
over ten year periods during the span of the FDIC’s existence. As the chart shows, the average
number of failures per year from 1934 to 1943 is an outlier, but this is because the number of
failures was high due to the Great Depression. Following the Great Depression, the average
number of failures per year was consistently low for three decades. With the introduction of
assistance transactions during the 1970s, the average number of failures per year increases
threefold from 5.5 over 1964 to 1973 to 15.8 over 1974 to 1983.
Coinciding with the theory, the chart demonstrates that as banks no longer expected to receive
assistance over the period from 1994 to 2003, the average number of bank failures per year fell
to 6.6, which is comparable to the average number of failures prior to the 1980s. However, it is
important to consider that the number of banks in operation have been steadily declining since
the mid-1980s, as shown in Figure 4.4. Although the average number of bank failures in the
decade following the mid-1980s decreased, it is reflective of a higher percentage of banks which
failed out of the total number of banks compared to the proportion of bank failures prior to 1984.
Nonetheless, the drastic decline from an average of 224.2 bank failures over the period from
1984 to 1993 to an average of 6.6 bank failures from 1994 to 2003, signifies banks responding to
the hard budget constraint imposed by the FDIC’s decision to no longer provide assistance.
However, the period from 2004 to 2013 shows a drastic increase in the average number of
31
failures per year, which is due to the financial crisis of the Great Recession. The Great
Recession also marks the reemergence of assistance transactions provided by the FDIC in 2008.
Figure 4.4
Source: fdic.gov
32
Chapter 5 – Conclusion
Despite the changes made by the FDIC to harden the budget constraint, news outlets
continued to reflect anticipated bank failures into the 1990s. These articles cited continued
economic downturn as an indicator of expected failures. However, the fact that failures declined
by 90.6 percent over the four year period from 1989 to 1993, while the number of assistance
transactions fell from 238 in 1988, to just 3 or less over the period, gives support that the banking
failures of the 1980s persisted because of the soft budget constraint in place. Therefore, bank
failures perpetuated as a result of the FDIC’s policies, rather than as an inevitable consequence
of economic downturn.
Although the FDIC engaged in assistance transactions for the sake of preventing spillover
costs into the economy, the emergence of the soft budget constraint has led to increased costs
through the prolongation of risky bank behavior that otherwise would not have occurred under
the presence of a hard budget constraint. Additionally, it is clear that the softness of the budget
constraint has stemmed from the dilemma of too-big-to-fail banks and their supposed
macroeconomic risks. Applying the Samaritan’s dilemma explains how the softening of the
budget constraint occurred as both the FDIC and the FDIC member banks acted in the game to
pursue short-run utility maximization. The dilemma resulted as widespread bank failure ensued;
the risk seeking behavior of banks and the commitment credibility problem of the FDIC
developed as symptoms of moral hazard, and long-run utility maximization was ultimately
compromised.
Despite the actions made by the FDIC to harden the budget constraint, the Samaritan’s
dilemma still contributes to a softening of the budget constraint in the banking industry in the
33
case of too-big-to-fail banks. For instance, although the FDIC has reduced the rate of assistance
transactions, the FDIC still protected banks considered too-big-to-fail in 2008 and 2009 during
the financial crisis of the Great Recession. Applying this same theoretical model of the
Samaritan’s dilemma would contribute to the research on this most recent financial crisis to
identify if a moral hazard problem influenced the behaviors and expectations of banks based on
the actions of the FDIC during this period.
Although the FDIC has taken measures to harden the budget constraint, it will still
exhibit softness as long as the FDIC considers banks too-big-to-fail. In order to eliminate the
Samaritan’s dilemma, the FDIC would have to completely refrain from providing assistance to
failing banks. However, as long as the FDIC has the capacity to provide assistance, it will
continue to do so, since the FDIC believes that ensuring social well-being through assistance is
less costly than allowing the large banks to fail. Thus, the Samaritan’s dilemma may never be
solved. However, despite some softness, a hard budget constraint is still possible as long as the
FDIC commits to abiding by clearly defined rules and standards for carrying out assistance
transactions, which will prevent the soft budget constraint from emerging and generating further
economic costs.
34
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37
About the Author
I began my time at Allegheny College undecided
upon what I wanted to pursue as a major. After taking some
economics courses and discovering all of the opportunities
that the department had to offer, I found that I was taking
classes that I was genuinely interested in, rather than simply
enrolling in to fulfill requirements. The economics
department directed me to my first internship as a
sophomore with Wells Fargo, which led me to a second
internship and subsequent job offer at Wells Fargo. Following graduation, I will begin my career
as a middle market financial analyst with Wells Fargo.
During my time at Allegheny, I have had great joy competing on the Ultimate Frisbee
team, working as the business manager for The Campus, serving on the Finance and Facilities
Committee, and volunteering as a mentor in the Big Brothers Big Sisters program. The culture at
Allegheny College has driven me to be an engaged and active participant in my community.
Overall, Allegheny College has prepared me for my career and inspired me to pursue interests
that have been cultivated by my liberal arts education.