Federal Deposit Insurance: A Banking System Built on Sand

Federal deposit insurance grew out of a turbulent time in American history: the Great Depression. During two waves of bank failures in the 1930s an astonishing 9,000 banks closed and millions of depositors lost some or all of their savings. The Federal Deposit Insurance Corporation (FDIC) began operations in 1934, insuring deposit accounts up to [...]

Losing the FDIC

“In the darkest days of the financial crisis a year ago, Sheila Bair was hailed for having predicted the housing bust. Today, the chief of the Federal Deposit Insurance Corp. is fighting for her agency’s future. “The FDIC was set up in 1933 as part of a successful attempt to rescue the banking system, and [...]

Do We Need Deposit Insurance?

f banks can suspend convertibility, depositors know that runs merely precipitate suspension. This greatly reduces depositor incentive to panic and run. Allowing banks the right to suspend would probably not eliminate all runs, but it would plausibly limit them to banks that are insolvent rather than merely illiquid.

The question, then, is whether a banking system with less regulation—no prohibition on suspension and no deposit insurance—might work better than current regulation—prohibitions on suspension, combined with deposit insurance and balance-sheet regulation.

The evidence from the pre-1914 era suggests that the regime with less regulation has promise. Banks were not legally allowed to suspend convertibility during this era, but many did so anyway, sometimes with explicit approval of, or even encouragement from, regulators. This did not eliminate runs and panics, but the record suggests that suspension reduced contagion and failure in these episodes.

The Subprime Crisis Shows that Government Intervenes Too Little in Financial Markets?

Start with two assumptions. No. 1: banking and financial markets are inherently unstable. No. 2: government intervention into banking and financial markets can only stabilize (never destabilize). You’ll find it easy to conclude that any period of market instability we experience, like the recent subprime-lending problem, is the market’s fault and that it could have [...]

The Fed: The Inside Story of How the World’s Most Powerful Financial Institution Drives the Markets

Reviewed by Larry Schweikart Martin Mayer has been writing books on banking for years, and never lacks for a publisher. His books tend to ramble, however, and this one is no exception. Worse, they tend to reinforce erroneous notions about the supposed need for government intervention in financial markets and institutions. Mayer begins with a [...]

Deposit Insurance versus Branch Banking: The S&L Debacle

Larry Schweikart teaches history at the University of Dayton. Those of us old enough to have parents or grandparents who lived through the Great Depression have probably heard the remark that “Franklin Roosevelt saved the banking system with deposit insurance.” The purported value of federal deposit insurance for keeping banks solvent is assumed, and virtually [...]