A Case for Reforming Federal Deposit Insurance
Federal deposit insurance has long been regarded as one of our most successful government programs. It is now in need of serious repair. Established in 1933 to stem an instability problem in banking, deposit insurance succeeded as well as Congress could have hoped. More recently, however, as federally insured institutions have become less regulated, a problem with deposit insurance has surfaced. In order to allow banks to survive in a more competitive environment, Congress and bank regulators, over the past eight years, have relaxed the regulatory reins. But they did not, as some advised, reform deposit insurance.2 As a result, banks have become more competitive but at the expense of taking on considerably more risk. In effect, a fundamentally difficult problem with deposit banking has been exchanged for one with deposit insurance.
KeywordsMoral Hazard Deposit Insurance Bank Failure Moral Hazard Problem Bank Risk
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