A suggestion to the banking industry: Eliminate the FDIC?

March 29, 2010 1 Comment »

An interesting article was forwarded to us this weekend out of Yahoo’s financial section that was released last Friday. It’s titled “Five Suggestions for Banking Reform” and it’s written by Peter Atwater who spent 10 years building JPMorgan’s securitization business in the late 1980′s and early 1990′s.

As the title of his article suggests, he is lending his experience and wisdom to the banking industry by suggesting 5 major reform idea’s which he believes will help the industry grow in a healthy direction. And while all 5 of his suggestions deserve discussion, we would like to narrow in on one specific notion…

As he states, “at the risk of being bold, the time has come to eliminate FDIC insurance.” He goes on to explain that, “When the FDIC was created in the 1930s, it was intended to be a temporary solution. Today, it puts the US taxpayer on the hook for more than $7 trillion in bank liabilities. But as a consequence, depositor due diligence is non-existent. And putting Wall Street aside, this crisis has shown, even with specific oversight, hundreds of now-failed banks took excessive risk in their traditional banking businesses and their insured depositors neither cared nor were adversely impacted. Their risk was borne by the government, while they earned returns far in excess of comparable US Treasuries. If we’re truly going to eliminate “moral hazard”/”too big to fail” we must eliminate deposit insurance in the process.”

How would this effect deposit rates offered by the large banks? If Peter’s suggestion was put into action, would bank CD’s then be considered “risky” investments or would this motivate banking institutions to build a more trustworthy brand?

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  • Rick

    It will motivate banks not only to build a more trustworthy brand, but also provide more incentives to depositors. It will also break the stranglehold banks have on our economy.