Would Removal of FDIC Insurance Actually Help the U.S. Banking System?
January 21, 2010
As we blog, Larry Kudlow is hosting a discussion that includes talk of abolishing FDIC insurance as a way to make the banking system safer. At first this seems totally contradictory, but upon closer inspection, this view may have some merit.
The term coming into use is "narrow banking." That is, banks that hold money on deposit--for example, a CD, money market account, or savings account--would need to avoid trading or otherwise investing that money in enterprises that could fail utterly. Only the lowest risk banks would be formally backed by the federal government.
In turn, depositors would forfeit FDIC insurance. This would mean, in practice, that putting your money in Chase bank, a division of JPMorgan, would indicate that you were prepared to constantly evaluate the behavior of that bank, to see if you wanted your money in that pot.
But if you wanted a plain vanilla CD, money market account, or savings account with a 100% guaranteed return of capital if you need it, you would go to a bank that exists to hold money, rather than to use money to make more money. Your bank would have to adhere to "narrow banking."
Could no insurance, in that respect, be the best insurance of all for bank deposits?
