Deposit Insurance and the Politics of Regulatory Subsidy
In US financial regulation, deposit insurance is the quintessential regulatory subsidy. The insurance guarantee, which covers deposits in banks (and certain other depository institutions) up to a maximum of $100 000 (since 1980), may appear to be a straightforward consumer protection scheme, designed for the benefit of small depositors who otherwise would suffer financial loss in the event of bank failure. And certainly deposit insurance is not unique to the US. In recent years, some form of deposit guarantee has become a part of many national bank regulatory regimes.
KeywordsBanking Industry Federal Reserve Hedge Fund Credit Union Large Bank
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Notes and References
- In another context, I have characterized traditional US bank regulatory strategy as reflecting the viewpoint of the typical private debtholder, who uses contract to restrict the borrower’s discretion to alter its risk posture in the future. In US bank regulation, these regulatory ‘covenants’ have included laws restricting bank investments, diversification and payment of excessive dividends to shareholders. Helen A. Garten (1990), Why Bank Regulation Failed: Designing a Bank Regulatory Strategy for the 1990s (Westport, CT: Quorum Books), pp. 23–59.Google Scholar
- Carter H. Golembe (1960), ‘The Deposit Insurance Legislation of 1933: An Examination of Its Antecedents and Its Purposes’, Political Science Quarterly, vol. 76, p. 188; Jesse H. Jones (with Edward Angly) (1951), Fifty Billion Dollars: My Thirteen Years with the RFC (1932–1945), (New York: Macmillan), pp. 45–6; Arthur M. Schlesinger, Jr. (1958), The Coming of the New Deal, vol. 2 of The Age of Roosevelt (Boston: Houghton Mifflin Company), p. 443.Google Scholar
- Milton Friedman and Anna Jacobson Schwartz (1963), A Monetary History of the United States, 1867–1960 (Princeton: Princeton University Press), pp. 421–42, especially p. 427.Google Scholar
- Jones, op. cit., note 3, pp. 61–6; Arthur M. Schlesinger, Jr. (1957), The Crisis of the Old Order 1919–33, vol. 1 of The Age of Roosevelt (Boston: Houghton Mifflin Company), pp. 475–6.Google Scholar
- Stephen K. Halpert (1988), ‘The Separation of Banking and Commerce Reconsidered’, Journal of Corporation Law, vol. 13, pp. 497–8; Helen A. Garten (1990), ‘Subtle Hazards, Financial Risks, and Diversified Banks: An Essay on the Perils of Regulatory Reform’, Maryland Law Review, vol. 49, p. 344.Google Scholar
- As I have suggested elsewhere, after the Continental Illinois rescue, in wholesale deposit markets, investors probably used size as a proxy for risk. Helen A. Garten (1986), ‘Banking on the Market: Relying on Depositors to Control Bank Risks’, Yale Journal on Regulation, vol. 4, pp. 145–8.Google Scholar