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Unlimited Deposit Insurance: A Radical Idea Is Resonating in Congress


The federal bailout for Silicon Valley Bank depositors rolled in at historic speeds and may have saved the US economy from a devastating wave of bank bankruptcies, but it also highlights potential need for a comprehensive overhaul of the US deposit insurance system and broader US banking regulations.

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

Yellen responded as the law stipulates that she should: Uninsured deposits will only be guaranteed if your bank’s failure causes “systemic risk” to the platform. US economy.

Read more: Yellen says banking system ‘healthy’, as analysts see little chance of new legislation for crisis sector

Of course, no one thought the failure of a midsize regional bank posed a risk to the entire U.S. economy until last week, and it would be reasonable to expect that regulators in Futures may again rely on the systematic risk exception in the law. justifies the protection of the hard-earned savings of U.S. individuals and businesses.

Furthermore, it was Silicon Valley Bank’s reliance on uninsured deposits – deposits that exceeded the $250,000 insurance provided by the Federal Deposit Insurance Corporation – that made the bank easy to withdraw money in the first place.

That’s why some lawmakers, including Republican Senator Mitt Romney of Utah and Senator Elizabeth Warren of Massachusetts, are clamoring for the idea of ​​enacting universal deposit insurance, according to a report in Semafor.

A major concern for other powerful lawmakers is how to pay for that money, as the vast majority of Americans can hardly imagine having $250,000 in a bank account. A spokesman for Senator Sherrod Brown of Ohio, chairman of the Democratic Senate Finance Committee, told MarketWatch that Brown believes “any changes made to deposit insurance must protect small businesses and employees, not big investors.”

Robert Hockett, who teaches monetary law and economics at Cornell Law School, argues that because lawmakers reformed the FDIC system so that it is funded with risk-based pricing, the enhancement Full ceiling would be relatively easy.

“We charged the premium based on the banks’ own risk profiles,” Hockett told MarketWatch. “Risker banks pay higher premiums just as smokers pay higher health insurance premiums.”

Hockett advocates raising the ceiling altogether, allowing banks to assess fees on larger accounts to offset the cost of additional insurance, and prohibiting banks from valuing such fees on small accounts than.

An added benefit of this approach, Hockett argues, is that it would narrow down the so-called shadow banking system or the network of non-bank intermediaries such as money market funds that businesses rely on as tools. cash management.

“There will be a lot 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 regulators and partners its financial health is difficult to gauge.

The banking industry will likely resist a move to raise the deposit insurance ceiling, as the 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 banks and other US taxpayers.

Furthermore, the move to unlimited deposit insurance could open the door to an even more radical reform of the banking industry, like the introduction of retail bank accounts at the Federal Reserve Bank. Federal Reserve.

Dean Baker, a senior economist at the Center for Left-wing Economic Policy Research, argued for the move. in a recent blog post, writes that modern technology makes it possible for the government to run a single payment network at a much lower cost than the patchwork of private systems in use today. Why allow private banks to finance themselves with cheap consumer deposits when the government guarantees them?

“We will have a system run by the Fed to do the majority of conventional financial transactions, replacing the banks we use today,” Baker wrote.

“However, we will continue to have investment banks, like Goldman Sachs and Morgan Stanley, that will borrow in financial markets and lend money to businesses, as well as underwrite stocks and bonds, ” he added. “While investment banks still require regulations to prevent abuse, we don’t have to worry about them failing to shut down the financial system.”

The complementary nature of unlimited deposit insurance and government-funded retail banking may deter some in Congress from advocating it, given the stiff opposition to retail accounts by the government. Federal Reserve that Republicans have been vocal about in recent years.

For example, Republican Representative Tom Emmer of Minnesota, said last year that the Fed’s retail accounts would put the United States “on an insidious path akin to China’s digital authoritarianism.”

However, the existing public system of subsidizing private bankers with implicit deposit insurance may also be unsustainable.

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