Big Banks May Be Forced to Pay Extra Insurance

The so-called “G20″ nations will meet today and tomorrow in Pittsburgh. One particularly prominent issue is what to do about banks that are “too big to fail.”

If you have CDs, savings accounts, or money market accounts, the G20 meeting may actually amount to something more than bland platitudes this year.

Big Banks Backed by Government No Matter What

The repeated and massive bank bailouts of the past year and a half have given rise to a belief that big banks will be bailed out by their respective governments no matter what.

In a classic case of perception becoming reality, this is now true–or at least enough big bank customers think it’s true that it may as well be true.

Possible Solution: Extra Insurance for Big Banks

One idea that is being floated, and is especially favored by European central bankers, is that big banks that pose a “systemic risk” should be charged an extra insurance fee.

That this idea is popular is clear. German Chancellor Angela Merkel went so far as to pledge that banks must not be permitted to “blackmail states again.”

What is less clear is to whom this extra insurance would be paid. To the individual governments themselves, or to some sort of global consortium? Also, how high should such insurance be priced?

Why should holders of CDs, savings accounts, and money market accounts care how all this shakes out?

Because another increase in bank costs may well be passed on to bank customers, for example through lower interest rates paid on CDs.

It’s highly doubtful that big banks would just eat the costs.