WASHINGTON, DC – AUGUST 18: Entrance to the Federal Deposit Insurance Corporation (FDIC) is seen on August 18, 2024, in Washington, DC. (Photo by J. David Ake/Getty Images)
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Greater federal deposit insurance would weaken banks, bank depositors, and the broader US economy. Say what is true repeatedly.
To see the obvious contradiction in legislation that means increasing deposit insurance from $250,000 per account to $10 million per account, just look a little deeper into the details. Insurance is for interest free accounts.
Bank accounts that do not pay interest speak strongly about the wishes of the holders of these accounts. These are generally checking accounts. Current account owners want little to no risk. Call it non-interest bearing accounts: saving money for everyday spending needs, debit cards or just paying bills.
By extension, banks understandably take the wishes of interest-free account holders very seriously. Money should not be put at great or even small long-term or short-term risk precisely because it is expected to be easily accessible without penalty as a consequence of not paying interest on the funds.
It speaks to the almost complete inconsistency of proposed federal legislation aimed at increasing federal deposit insurance. The legislation implies that money placed in a checking account for day-to-day transactions is money that banks put at risk. No, not at all. Which once again explains the lack of interest. Think of it with significantly expanded FDIC insurance in mind.
Suddenly funds stored in banks for everyday use and not at risk for that very reason would be federally insured as if they were. There are costs associated with such insurance. And as already mentioned, the banks will bear those costs by paying billions more into the FDIC insurance fund.
It means that banks will suffer twice: firstly from higher insurance costs and secondly from a reduction in profitable lending. From this, readers can infer hope that an unnecessary cost imposed on banks will be paid for through reduced economic activity thanks to lending shrunk by federally mandated insurance cost increases.
Going back to bank depositors, assuming they won’t pay for increased deposit insurance is really naive. This is because FDIC insurance increased interest free The accounts will logically increase the cost for banks to host these accounts in the first place. Translation, the fees associated with interest-free accounts will almost certainly increase to reflect the cost of insurance for accounts that, because they don’t pay interest, don’t require much insurance to begin with. The average household checking balance is $5,300.
Which brings us back to the legislation itself. To say it’s a solution in search of a problem is an understatement. Except it’s much worse. Since increased deposit insurance will increase costs for both banks and bank customers, it will hurt both while reducing economic vitality by reducing the availability of money for an economy that depends on it.
