The Case for Ending Deposit Insurance

The Fed proposes looser lending standards. I propose ending deposit insurance.

The standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category. Deposits held in different ownership categories are separately insured, up to at least $250,000, even if held at the same bank

Do we need deposit insurance?

No, assuming a sound banking structure.

In response to Just in Time Stimulus: Fed Proposes Looser Rules for Large U.S. Banks a reader asked: "If we got rid of deposit insurance, what protection would savers have?"

That's a good question.

The answer is none. But with 100% reserve requirements there would not need to be any, except to protect against theft and fraud. Banks would not be able to lend checking deposits. Savers take a risk on interest-bearing deposits, as they should.

My Proposal

  1. End the Fed
  2. End fractional reserve lending
  3. End the bailouts
  4. End deposit insurance
  5. Let the free market select what is money

Point number two is the key. A 100% reserve requirement eliminates the need for deposit insurance. Money held for deposit only, has no lending risk.

There is a tiny risk of theft or fraud which could be covered by private insurance. Warren Buffet would probably be willing to undertake the endeavor as risk of theft from banks is extremely small.

If you lend money for interest there should be risk. The risk is banks make bad loans.

Savings deposits and CDs are not really "savings" accounts at all. In both, you agree to let the bank lend your money in return for interest.

Checking accounts are supposed to be available on demand. Banks cannot lend checking accounts under my proposal.

Mike "Mish" Shedlock

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Mike Mish Shedlock
Mike Mish Shedlock


"It would seem likely that one of the consequences of 100% Reserves Requirement would be to push normal people to an all cash economy."


Ponder a bank that does not make loans. It would need no loan officers. Few tellers. Almost nothing.

Al this bank would do is take deposits and charge fees. The fees would be minimum. It would provide checks and do wires in and out for fees.

100% of the money would be available on demand.

A small 0.5% annual fee would likely be enough to make a profit.

Who would use such a bank?

Well, as soon as you end FDIC, damn near everyone who is thinking.



Subsidies by the state and cross products need to stop. Lets say there is transparency regarding risk and return by product line in a bank (wishful thinking I know) and the government stops subsidies (even greater wishful thinking). Also lets say core money supply is formulaic. It is Item 2 on Mish's list that I am not sure about. Whilst it is anchoring perhaps it is too anchoring for a society. Leverage is a form of optimism and permits experimentation and growth. I am not certain but my inclination is that as long as the targeted investors take the hit for the leverage item 2 is a solid positive add to society. It is kind of like, is bankruptcy law fair or does it permit risk taking so that net net it is a positive npv facilitator for society.


Ok, so Mish is actually not proposing Full Reserve Banking but rather Fractional Reserve Banking where everything is the same except banks have to offer a new product called "safe box secured checking account".

The funny thing is that it does not change anything.

The requirement for banks to do duration matching between depositors and borrowers also does not change anything, because bank failures will still happen as bank's asset side deteriorates (in case one of the borrowers default) or liability side explodes (in case interest rates are not fixed).

And Bank Runs will still happen under such system except they will be rate limited until deposits mature. Banks under current system already can rate-limit withdrawals by imposing withdrawal limits. So really no benefit here.

And the big question is whether in his system depositors can sell their deposits in secondary market or cancel by paying early withdrawal penalty? If yes, this would have immense upwards pressure on interest rates once everyone will dump their deposits in a failing bank.


It would seem likely that one of the consequences of 100% Reserves Requirement would be to push normal people to an all cash economy. Since a bank would have no opportunity to earn income from checking deposits, we would all have to pay fees for having checking accounts. This would cause workers to pressure businesses to pay them in cash.

For lendable savings-type deposits, the problem of matching deposit duration to loan duration would become quite a high-overhead issue. Since it would not be possible to access deposits even in an emergency, most savers would probably go for short term deposits (3-6 months). That means the entrepreneur who needs a 5-year loan to build his business would likely end up with a series of short term loans that would have to be renegotiated frequently -- and possibly would not be available at all at some point, depending on the flow of deposits.

I understand the positive features of 100% RR -- but there would need to be a lot of thought given to how to ameliorate the downsides.

Mike Mish Shedlock
Mike Mish Shedlock


"For this to properly work, you also need sound money. Otherwise, banks can always lend out checking deposits by debasing them. Then lending out the share of them acquired by this, indirect, route."

Stuki that makes no sense. In a 100% reserve setup, it would constitute fraud and executives would land in prison if they lent money available on demand (e.g. checking accounts).