The Many Harms of Unlimited Deposit Insurance

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Unlimited deposit insurance – the government guaranteeing that bank accounts of any size be made whole-in the event of a bank failure – would create an extremely dangerous moral hazard that would lead to much greater risk in the banking system. Under such a policy, even the wealthiest, most financially sophisticated individuals would have much less incentive to monitor what their banks were doing – by for instance, looking at private credit rating issued for the bank – if they knew the government were to guarantee any amount of money they put in a bank. With much less oversight from their largest customers, banks would have more incentive to mismanage their risks, particularly to please their political overlords through causes such as those favored under the ESG (environmental, social, and governance) framework.

In addition, unlimited deposit insurance is a regressive policy that will be harmful to economic growth. Guaranteeing bank accounts without limit subsidizes the richest Americans, as well as wealthy foreigners, incentivizing them to park their money in bank accounts rather than actively invest in job-creating new businesses.

And if coupled with the Biden administration’s proposed tax rate hikes such as that on unrealized capital gains for investment in business, unlimited deposit insurance would really pour fuel on the proverbial fire by telling investors that the government will take more from them if their investment in a job-generating startup business is successful but will provide an additional margin of safety if their money just sits in a bank vault!

Unlimited deposit insurance would also harm prudent banks and their customers by massively hiking the premiums and assessments they have to pay to make the wealthy customers of the reckless banks whole. Prudent banks struggling with the fallout of the Silicon Valley Bank and Credit Suisse collapse should not be further burdened by costly, counterproductive subsidies or regulations that hamper their ability to serve their customers with sound fiscal management.