CEI warns House committee of dangers of deposit insurance hike

Starting with our late founder and president Fred Smith, CEI has long warned of the risks posed by government-provided deposit insurance to the nation’s banks. In 1989, Fred wrote with Melanie S. Tammen (reprinted here on page 29 of The Quotable Fred) that under deposit insurance:

Deposits have become risk-free, encouraging speculators to rush funds to whatever institutions offer the best interest rate.… All this has created a major “moral hazard.” Pending regulatory action, troubled financial firms are free to raise their yields from better managed or more fortunate institutions.

Fred was writing of the perils created when deposit insurance was raised from $40,000 to $100,000 per depositor at a financial institution, and scholars agreed that this more-than-doubling of deposit insurance in the early 1980s was a major factor in the savings-and-loan collapse of the mid-to-late 1980s. Now, CEI and others – from policy scholars to community bankers – warn of an even greater moral hazard stemming from a bipartisan Senate bill that would hike the current deposit insurance limit from $250,000 to $10 million for non-interest business accounts.

This week, the House Financial Services Committee held a hearing in which both policy scholars and community banker Jill Castilla that such a large hike would endanger the financial system and impose significant cleanup costs on prudently managed banks. CEI submitted a letter I authored to further highlight the likely harms, including imperiling needed deregulatory measures that would help the banking sector better serve consumers and entrepreneurs. The letter states that, “should an implosion of banks result from the increased deposit insurance limits, it could put at risk both U.S. markets and the deregulatory initiatives this committee and the Trump administration is pursuing.”

The full letter can be read here 

Former CEI Research Associate Ian Agulto contributed to this post