In theory the FDIC acts as a kind of insurance co-op among banks. They’re charged assessments to keep the FDIC’s coffers flush, and when one goes down, the customers deposits are replenished from this money.
That’s in normal times. In abnormal times — when there is a wave of systemic bank failures, such as there is now — it’s not really an insurance organisation at all. It’s just the conduit for taxpayer cash to make depositors whole.
The blog Winterspeak wonders: why does the FDIC continue to assess fees, and what are they for? He argues, we think correctly, that FDIC fees are basically a banking tax; they’re not insurance premiums. But then, why are we taxing banks at a time when we want them to loosen the purse strings and lend more. It really doesn’t make sense.
The only reason we keep the assessments, it would seem, is to keep up an illusion that somehow the banking system is self-insured, and that it’s not just backstopped by Uncle Sam. But of course it is. This is a terrible reason to keep up a system. So let’s just have the FDIC purely backstopped by the Treasury, and let’s eliminate this constraint on lending.
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