Eighteen years ago, America modernized its by-then anachronistic system of federal bank deposit insurance. Together Federal Deposit Insurance Corporation Reform Act of 2005Congress ended the first, 1933-old method of funding Deposit Insurance Funds (DIFs) with risk-apathy, for this Assessments are levied only when funds fall below certain amounts, replacing it with a modern, risk-valued premium model of the type used by efficient insurers for centuries.
the old system has been countercyclical and therefore destabilizing, since DIF tends to fall only during correlated bank failure; And prone to moral hazard, not to mention injustice, by pricing insurance equally for both risk-taking and risk-averse banks. The new system helpfully put an end to all that, and modern deposit insurance finally matured.
While the move to regularly assess risk-value premiums eliminated the systematic volatility of the earlier regime and eliminated moral hazard, it left out another feature. old regimeE – Coverage Cap – Insulated. It was a mistake – a mistake that is now proving costly and, ironically, is now dangerously anachronistic in itself.
Mistake 1: FDI coverage is cap of the remainder – a kind of financial equivalent of the human tailbone. What was originally indicated under the 1933 rule was precisely the lack of a risk-value premium. With the subsequent regime change, the cap regime became quite redundant – just a prelude to essential and easily affordable coverage.
Next up, danger: The cap rule has become worse than unnecessary at this point – that’s positive pervert, Collapse of Silicon Valley Bank (SVB) in March 2023
With our nation now once again embarking on a grand project of industrial renewal with green-friendly lines, sector-specific industrial banks of the SVB type, that once flourished during the industrial ages before our, will come into increasing demand. Because they offer specialized banking tailored to the needs of specific sectors and industries in the economy of our continent-sized country.
we should be welcoming Really Promoting This development is a huge and very necessary A reversal of the disastrous deindustrialization, ‘financialization,’ homogenization, and banking concentration of the past 40 yearswho have eroded the productive capacities of our country, but with them, the economic, political and social foundations of our republic, not to say national security.
The problem we have with this necessary and welcome change, however, is that industrial firms typically have large operating budgets and payrolls, meaning that transaction accounts limited to $250K are grossly inadequate – ‘chump change’. Accordingly firms are forced either (a) to embrace non-insurable risk in the form of large uninsured bank deposits, or (b) systemically unstable or sector-indifferent ‘shadow banking’ markets or Megabanks to resort to the usual one-size-fits-all Wall Street.
Far better for new industrial firms to face this dilemma – and in keeping with both our pre-21st century banking traditions and bank concentration (antitrust) concerns – than to re-proliferate safe, ‘boring’ industrial banks and credit unions. It has to be promoted from every sector and sector of our country and its economy. It was like visions of Hamilton, Jefferson and our other founders, not to mention Lincoln, Brandeis, FDR and other heroes of broad-based American industry.
I have drafted accordingly Legislation With a view to accomplishing these ends.
some easy tricks – Removing the cap, continuing the value-at-risk premium assessment, and allowing small surcharges on accounts over $250K – all required. Shareholders, managers, and subordinated creditors will certainly not be exposed, and will be subject to ‘claws’ and prosecutions for suspiciously timed stock sales or distributions to non-depositors.
and it is specified in all only a few pages of legislative text, It’s also in front of members of Congress in both houses on both sides of the aisle – a simple and overdue bicameral, bipartisan modernization of the nation’s system of bank deposit insurance.
Make this simple change to the federal deposit insurance system now, while the proverbial iron is ‘hot’, and at a stroke we will both fuel the nation’s nascent industrial renewal and obviate the need for any future bank ‘bailouts’ or Ahead of Fed ‘Facility’ acronyms with an ‘F’ at the end.
Credit: www.forbes.com /