Which of the following is a key outcome of FIRREA?

The key outcome of FIRREA (Financial Institutions Reform, Recovery, and Enforcement Act of 1989) is indeed the creation of risk-based capital standards. This legislation was enacted in response to the savings and loan crisis of the 1980s and aimed to improve the safety and soundness of financial institutions. By establishing risk-based capital standards, FIRREA mandated that banks and other financial institutions maintain capital reserves that are proportionate to the riskiness of their assets. This approach helps ensure that banks are better prepared to absorb losses, thereby enhancing the overall stability of the financial system.

The introduction of these standards was significant because it encourages financial institutions to operate more prudently, managing their risk exposure effectively. It also promotes transparency and accountability within the banking sector, ensuring that institutions are adequately capitalized to cover potential risks associated with their lending and investment activities. This shift towards a risk-based assessment aligns capital requirements more closely with the actual risk profiles of banks, leading to a more resilient financial sector.