Unlimited Deposit Insurance: A Revolutionary Idea That’s Gaining Steam In Congress

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The federal bailout of depositors at a Silicon Valley bank was conducted with historic speed and may have saved the US economy from a devastating wave of bank failures, but it also weighed on the potential need for a dramatic overhaul of the US deposit-insurance system and banking regulations. sheds light. more broadly.

In a hearing before the Senate Finance Committee on Thursday, MPs asked Treasury Secretary Janet Yellen has a question on the minds of many Americans: Should regional-bank depositors expect the federal government to bail them out if their bank fails?

Yellen responded to the letter of the law as she should: uninsured deposits would be guaranteed only if the failure of your bank poses a “systemic risk” to the US economy.

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Of course, no one thought until last week that the failure of a midsize regional bank posed a risk to the entire U.S. economy, and it’s reasonable to expect that regulators will once again legislate on the systemic-risk exception in the future. may depend. It is worth protecting the hard-earned savings of American individuals and businesses.

What’s more, it was the Silicon Valley bank’s reliance on uninsured deposits—which exceeded the $250,000 insurance limit provided by the Federal Deposit Insurance Corp.—that made it susceptible to a bank run in the first place.

That’s why some lawmakers, including Republican Sen. Mitt Romney of Utah and Sen. Elizabeth Warren of Massachusetts, are warming to the idea of ​​enacting universal deposit insurance. According to a report by Semaphore,

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A big concern for other powerful lawmakers is how to pay for it, given that most Americans can hardly imagine having $250,000 in a bank account. A spokeswoman for Sen. Sherrod Brown of Ohio, the Democratic chairman of the Senate Finance Committee, told MarketWatch that Brown believes “any changes to deposit insurance should protect small businesses and workers, not large investors.” ”

Robert Hockett, who teaches monetary law and at Cornell Law School, argues that because lawmakers have reformed the FDIC system so that it is funded with risk-based pricing, lifting the cap completely is relatively unlikely. It would be easy.

“We already base insurance rates on the risk profile of banks,” Hockett told Marketwatch. “Risk averse pay higher premiums like smokers pay higher premiums for insurance.”

Hockett advocates lifting the cap entirely, allowing to assess fees on large accounts to defray the cost of additional insurance and preventing banks from assessing those fees on small accounts.

Hockett argues that an additional benefit of this approach is that it will reduce the so-called shadow banking system, or the network of non-bank intermediaries such as money-market funds, on which businesses rely as cash-management tools. .

“There will be much less money flowing into the shadow banking sector, and that is a good thing,” he said, noting that the opacity of the shadow banking system makes it difficult for regulators and counterparties to measure its financial health.

The banking industry may struggle to lift the cap on deposit insurance, as increased fees could eat into profits. The status quo gives the industry an implicit guarantee that deposits will be insured, while the cost of that insurance is borne by more responsible and other US taxpayers.

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Furthermore, a move toward unlimited deposit insurance could open the door for even more radical reform of the banking industry, such as the introduction of retail banking accounts at the Federal Reserve.

Dean Baker, a senior economist at the left-leaning Center for Economic Policy Research, argued for the move in a recent blog post, writing that modern technology makes it possible for a government to run a single payment network at a much lower cost than the patchwork of private systems used today. Why allow private to fund themselves with cheap consumer deposits when the government is guaranteeing these deposits anyway?

“We will have a Fed-run system to carry out the vast majority of normal financial transactions that we use now,” Baker wrote.

“However, we will continue to have investment such as Goldman Sachs and Morgan Stanley, on the financial markets and lending money to businesses, as well as underwriting stock and bond issues,” he said. “While investment still need regulation to prevent abuse, we don’t have to worry about their failure to shut down the financial system.”

The complementary nature of unlimited deposit insurance and government-sponsored retail banking may deter some in Congress from supporting it, given the vocal opposition Republicans have voiced to Federal Reserve retail accounts in recent years.

For example, Republican Representative Tom Emmer of Minnesota, said last year That retail Fed accounts would put the US “on a similar insidious path to China’s digital authoritarianism”.

However, the current system of government subsidizing private bankers with built-in deposit insurance is probably not sustainable.

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