Why FDIC insurance is not a good idea | Toledo Newspaper
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A VIEW FROM THE GULCH
Why FDIC insurance is not a good idea
Written by Gary Rathbun | | [email protected]
Throughout the coming weeks I am going to spend some time on a particularly horrible piece of legislation that went
into full effect Jan. 1. There are so many bad things in this law that I can’t do it justice with only one short column,
so I will address different aspects over a period of time. This serves dual purposes: Firstly, I hope that it will keep you
from getting bored on one subject and secondly, most importantly, it will give my blood pressure time to get back to
normal.
One of the first provisions of the Dodd-Frank Act I would like to look at is Title III. There are several key things in
Title III that sound useful. For example, eliminating the Office of Thrift Supervision and moving its responsibilities
to the Office of the Comptroller of the Currency and the Federal Reserve. This isn’t necessarily a bad idea, except no
jobs were eliminated so no reduction in costs was seen.
I want to discuss the Title III provision that raised the federal deposit insurance level to 250,000 dollars and
expanded the assessment base for deposit insurance to total consolidated assets minus tangible equity.
Now, I know that I will get some pushback from my readers about FDIC protecting the depositors and ordinary
people from bank failures. The point I am trying to make is that if depositors are fully insured by the taxpayers and
banks are fully insured by the taxpayers, what incentive is there for prudent behavior of either party?
If your money is insured to $250,000, do you exercise any due diligence on the financial institution you put your
money in? Of course not. Why should you? It just doesn’t matter what the balance sheet looks like.
Deposit insurance started in 1934 for $2,500 per account and now has grown to $250,000 per
account. “Deposit insurance has taken deep root in the American banking system as an effective
way to prevent runs by bank depositors, [but] it distorts incentives in the banking system and
may not, on balance, help consumers,” according to Hester Peirce of the Mercatus Center.
President Franklin Roosevelt and his Treasury secretary at the time both opposed federal
deposit insurance because there was a fear that it would dull banks’ risk management.
Furthermore, deposit insurance decreases depositors’ incentive to monitor banks because if
something goes wrong the federal government will make good on the bank’s obligations should
the bank fail to do so.
.
It is easy to see that deposit insurance changes the behavior of both parties. If you did not have
FDIC insurance on your deposits you would make sure the bank is sound with proper business practices and use
more than one institution to prevent concentration of household assets. Since the bank has no accountability to the
account holders it can also engage in activity that will potentially bring in the most revenue instead of doing what it
needs to do to protect the assets of the depositors.
Title III also expands the base for deposit insurance. It is now based on total consolidated assets minus tangible
equity. This change effectively shifts more of the assessment burden from community banks to the larger institutions.
This shift will further embolden these larger banks to demand a government bailout in the future, based on the fact
that they have borne more of the Deposit Insurance Fund (DIF) assessment burden.
These changes are happening at a time when the DIF is already under great stress. By increasing the deposit
insurance, Dodd-Frank has further entrenched the government, instead of the market, as the primary monitor of
banks. Once again, the nanny state is looking out for you and if something goes wrong it will certainly kiss it and
make it feel better while someone else pays for it.
Gary L. Rathbun is the president and CEO of Private Wealth Consultants, LTD. He can be heard every day on 1370 WSPD at
4:06 p.m. on “After the Bell,” everyday on the Afternoon Drive, and every Tuesday, Wednesday and Thursday evening at 6 p.m.
throughout Northern Ohio on “Eye on Your Money.” He can be reached at (419) 842-0334 or email him at
[email protected].
http://www.toledofreepress.com/2013/02/21/why-fdic-insurance-is-not-a-good-idea/
3/29/2013