NEW YORK–How can the country avoid bank runs? Two writers with the New York Times have put out a proposal for consideration.
“If there has been a lesson in the recent spate of bank failures, it is that deposit flight can now happen quickly. It no longer requires a teller to hand money to customers waiting in long lines around the block. Tens of billions of dollars can vanish in hours or minutes,” wrote Andrew Sorkin and Lauren Hirsch of the New York Times’ DealBook newsletter. “That’s why guaranteeing deposits has become so crucial. The Federal Deposit Insurance Corporation explicitly insures the first $250,000 in any account, but nothing over that. The Biden administration has so far implicitly guaranteed all deposits by invoking a “systemic risk exception” — but such an implicit guarantee has not been genuinely tested against a run on multiple banks at the same time.
“There are fair arguments for the F.D.I.C. to guarantee all deposits, but there may be a more strategic, surgical and free-market solution.”
The Solution
That solution? Sorkin and Hirsch are proposing the banking system coalesce around a separate insurance program they call “F.D.I.C.+” for deposits above $250,000.
“Banks could decide whether to use the insurance program. If they did, they could market and advertise that all deposits were insured,” wrote Sorkin and Hirsch. “If they decided not to, the Federal Reserve could require them to have higher capital requirements and other restrictions to mitigate the possibility of a run. The Consumer Financial Protection Bureau could then require banks to use the equivalent of the warning label on cigarettes to show which accounts were not insured. This warning would appear on customer apps and statements, making it clear to customers when their money was not insured and they would not be rescued.”
‘Strong Incentive’
Such restrictions, the two argued, would be a strong incentive for banks to participate in the F.D.I.C.+ program.
“Because banks would pay to insure their large deposits, the program would also provide an incentive for better business models,” they explained.
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