Resolution Funding CorporationEdit
The Resolution Funding Corporation (RFC) was a United States government-sponsored entity created in the late 1980s as part of a broad effort to unwind a deep financial failure in the savings and loan sector. Authorized under the legislative framework that followed the savings and loan crisis, the RFC's mandate was to provide financing to the Resolution Trust Corporation (RTC) so it could acquire and liquidate failed thrift institutions and manage the orderly resolution of their assets. The arrangement was designed to keep the government’s direct outlays modest while letting the market bear the cost of unwinding troubled institutions through the sale of their assets and through industry assessments. The RFC carried out its mission by issuing marketable debt with a guarantee from the full faith and credit of the United States and by using the proceeds to fund the RTC’s activities until the resolutions were completed.
The early chapters of this program are rooted in the crisis that swept through the US financial system in the 1980s, when a wave of insolvent thrifts undermined confidence and the stability of credit markets. Regulators and lawmakers sought a mechanism that would avoid a monumental direct bailout while ensuring a credible, market-based approach to resolution. That environment produced the legal and institutional framework that gave rise to the RFC and the RTC, and it shaped the design of the debt financing that would underpin the resolution effort. For background on the crisis and the institutions involved, see the entries on the Savings and Loan Crisis and the Resolution Trust Corporation.
Creation and financing
Under the provisions of the Federal Financial Institutions Reform, Recovery, and Enforcement Act of 1989 Federal Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the RFC was established with the authority to borrow from the market to fund the RTC’s activities in closing insolvent thrift institutions. The RFC could issue debt securities up to a substantial cap, with the notes and other obligations backed by an explicit guarantee from the United States Department of the Treasury. This structure was designed to protect taxpayers from open-ended exposure while ensuring that the RTC had the resources necessary to complete the wind-down process. The RFC functioned as a backstop, in effect, a financing arm that allowed the RTC to purchase failing assets and run-off liabilities in an orderly fashion.
The RTC, created to manage the resolution process, bought troubled assets from failed thrifts and managed them through receiverships and liquidations. The value of the assets was realized over time through sales and liquidation proceeds, which were then applied to redeem RFC debt and reimburse the government’s guarantees. The interplay between the RFC’s borrowing program and the RTC’s asset-management program was central to the policy design: using private capital markets to finance a public objective, while spreading the eventual costs across the financial sector through assessments on insured depository institutions and through asset recoveries. See Resolution Trust Corporation for the agency that actually conducted the resolutions, and United States Department of the Treasury for the federal guaranty framework.
Operations and role in the crisis
The RFC’s primary job was to ensure that the RTC had sufficient liquidity to intervene in the crisis without triggering a broader, taxpayer-funded bailout. In practice, this meant issuing debt in capital markets and using the proceeds to fund the RTC’s acquisitions of impaired assets, as well as to cover administrative and resolution costs. Asset sales and ongoing collections from insolvent thrifts were expected to provide the return stream needed to redeem the RFC’s debt at maturity. The arrangement was designed to preserve the integrity of the financial system by maintaining credit flows and preventing cascading failures, while also imposing discipline through market-based financing structures and risk pricing.
From a policy perspective, supporters argue that the RFC avoided a much larger and more direct use of federal funds, channeling the resolution effort through a mechanism that placed the burden on the sector that benefited from the stability of the system. This aligns with the broader preference for market-based instruments and for limiting discretionary appropriations in the aftermath of the crisis. Critics, however, have pointed to the moral hazards and the long-term fiscal implications of backstopping failed financial institutions, even indirectly, and have questioned whether the measures were designed to address underlying incentives in the thrift industry or simply to manage the fallout. The debates surrounding the RFC touch on questions of regulatory design, regulatory capture, and the appropriate balance between market discipline and government intervention.
Controversies and debates
Cost and accountability: Proponents emphasize that the RFC’s approach minimized direct taxpayer exposure by leveraging private debt markets and tying the cost of resolution to the assets of the failed institutions and to industry assessments. Opponents contend that any use of public guarantees for private sector losses risks creating moral hazard, in effect softening the consequences for risky behavior by market participants and by some lenders or managers who benefited from implicit government backstops.
Market discipline versus bailouts: The RFC framework sought to preserve market discipline by funding resolutions through debt sold in private markets and through asset recoveries, rather than through broad general revenue appropriations. Critics argue that even with guarantees, the rescue function can distort incentives and delay necessary structural reforms in the regulatory framework that governs the thrift and banking sectors.
Regulatory reform and outcomes: The experience with the RFC and the RTC contributed to later reforms in financial regulation and resolution planning. Supporters argue that the framework demonstrated the viability of a targeted, market-based resolution tool that keeps the government’s direct fiscal exposure in check while preserving financial stability. Detractors suggest that the episode highlighted questions about how best to prevent moral hazard and about whether more fundamental changes—such as stronger capital requirements and more robust supervision—were required to reduce the likelihood of similar crises in the future.
Legacy
In the years after the resolutions, the RTC wind-down and the eventual settlement of the RFC debt helped compose a transitional chapter in the federal toolkit for financial distress. The episode remains a point of reference in discussions about how to structure government involvement in crisis resolution, how to balance taxpayer protection with market incentives, and how to design mechanisms that can function as credible backstops without inviting repeated risky behavior.