US deposit insurance debate

 US banking has always been a risky business. The financial panics of 1819, 1837, 1873, 1907 and 1931-32 all sparked banking crises, recessions or full-scale depressions. Depositors lost everything every time a bank failed. But the Great Depression was the trigger for a seismic change.

Congress created the Federal Deposit Insurance Corporation (FDIC) 

Oops. The 2008 financial crisis shattered that illusion, and this year’s expensive failures at Silicon Valley Bank and others show that the system has not returned to a state of stability. 

 “Shareholder value maximisation” theory gradually undermined traditional bank management conservatism, the 3-6-3 rule and the assumption that reasonable but stable returns were enough for banks.

Even president Franklin Roosevelt (a surprising opponent) described deposit insurance as “dangerous,” for in time it “would lead to laxity in bank management and carelessness on the part of both banker and depositor.”

Well, equity-based compensation just isn’t appropriate in the private/public hybrid banking model.

More fundamentally, we probably need to rethink which parts of our corporate law should be applicable to private/public hybrid institutions. As Martin Wolf pointed out recently, they should be seen as quasi-utilities

State and federal law should be changed to explicitly require bank boards to consider the interests of the FDIC insurance fund and the larger economy in the exercise of their fiduciary duty as corporate directors. And the FDIC should be able to sue them if they don’t.

Todd Baker FT 17 May 2023

Todd Baker is a senior fellow at the Richman Center for Business, Law & Public Policy at Columbia.

Martin Wolf on why banks fail and what to do about it

Banking stands revealed as a part of the state masquerading as part of the private sector.

Martin Wolf FT 21 March 2023

The 3-6-3 rule 
describes how bankers would supposedly give 3% interest on their depositors' accounts, lend the depositors money at 6% interest, and then be playing golf by 3 p.m. 

In the 1950s, 1960s, and 1970s, a huge part of a bank's business was lending out money at a higher interest rate than what it was paying out to its depositors (as a result of tighter regulations during this time period).

Bosses of failed US banks refuse to hand back millions of dollars in pay

Top executives from Silicon Valley Bank and Signature Bank refused to commit to voluntarily handing back the millions of dollars they were paid before the collapse of their banks triggered a US regional banking crisis.

Sommaren 1991 hälsade jag på min gamle gode vän Sven Rydenfelt. Vi talade om fastighetskrisen som då startat på allvar, och den tanklösa överbelåningen.

Ja, det är ju märkligt att människor inte tänker på vad som hände 1907, sa Rydenfelt

Nils-Eric Sandberg, DN 1996-10-18


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