Insured depositors have no reason to monitor how b

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Reforming FDIC Insurance with FDIC-Sponsored Deposit Self-Insurance

Our Price: $15.00

By Panos Konstas (au)
Year: 2005
Pages: 20
Binding Paperback

Product Code: 143792672X

Description

Insured depositors have no reason to monitor how banks perform or how safe they are. Only uninsured depositors have that incentive. This paper offers a plan to replace some insured deposits with uninsured deposits. The plan: the FDIC would guarantee loan contracts if the loantakers deposited the proceeds exclusively in uninsured deposits and backed those deposits with equity. This equity would ensure that the loan takers could share the likely costs if any of their depositories failed. The loans made under FDIC guarantee would only require interest at the risk-free rate. Thus the loan takers could offer the proceeds at lower rates than the rates paid on current deposits. Accordingly, funding by banks would shift to the new deposits, and since the new “self-insured“ depositors would have equity at stake, they would have no choice but to duly monitor their banks and impose rate premiums based on each bank‘s indigenous risk. With thesereforms, some very costly imperfections of current deposit insurance would be eliminated: the FDIC would now have in place a program that would dissuade banks from moral hazard and high risk and set the foundation for better disciplined, safer, and more cost-efficient banking. Figures.

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