The Case For Ending Deposit Insurance

The Fed proposes looser lending standards. I propose ending deposit insurance.

The standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category. Deposits held in different ownership categories are separately insured, up to at least $250,000, even if held at the same bank

Do we need deposit insurance?

No, assuming a sound banking structure.

In response to Just in Time Stimulus: Fed Proposes Looser Rules for Large U.S. Banks a reader asked: “If we got rid of deposit insurance, what protection would savers have?”

That’s a good question.

The answer is none. But with 100% reserve requirements there would not need to be any, except to protect against theft and fraud. Banks would not be able to lend checking deposits. Savers take a risk on interest-bearing deposits, as they should.

My Proposal

Point number two is the key. A 100% reserve requirement eliminates the need for deposit insurance. Money held for deposit only has no lending risk.

There is a tiny risk of theft or fraud which could be covered by private insurance. Warren Buffet would probably be willing to undertake the endeavor as risk of theft from banks is extremely small.

If you lend money for interest there should be risk. The risk is banks make bad loans.

Savings deposits and CDs are not really “savings” accounts at all. In both, you agree to let the bank lend your money in return for interest.

Checking accounts are supposed to be available on demand. Banks cannot lend checking accounts under my proposal.