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

Comments (42)
No. 1-17

It would be nice if I could find a reputable institution which would lend my savings in return for paying me meaningful interest. (Joke!)

It not clear what the implications of 100% reserve requirement would be. Banks still would have the age-old problem of borrowing short to lend long.

Big problems with Deposit Insurance today are (a) that it is "free", versus being paid explicitly by the depositor, and (b) we all know it is a sham anyway; if there is a real run on a major bank, the FDIC will not have the funds to cover the losses.


#6. End duration mismatch.

I Listen
I Listen

How do we get there from here? Realistically is it even plausible given where things are at?


Full Reserve Lending is anti-libertarian because it would require to introduce a new regulation that prohibits entities to lend money and borrow it back (through any intermediaries).

If you don't have that regulation and allow some entities in your system to lend and borrow money (at the same time) you have de-facto Fractional Reserve Lending. You can call those entities "unregulated banks", if you want.

We have never had Full Reserve Lending in the whole history of humanity. And Full Reserve Lending would never work, because any attempt to introduce it would cause Shadow Banking System to thrive which paradoxically would be de-facto Fractional Reserve Lending.

Fractional Reserve Lending is government's admittance that they can't ban entities that are lending and borrowing money at the same time. If you can't ban something, then just legalize it and introduce requirement that those entities have to maintain reserve ratio between their liabilities and their cash reserves. Call those entities "regulated banks".

Anyone in Computer Science should understand that Full Reserve Lending has to be acyclical graph, where nodes are entities and edges are money lent between them. Once you have local loop in the graph, you have unregulated Fractional Reserve Lending system.

Having said that, Fractional Reserve Lending system is unavoidable and people should rather embrace it instead of hoping that mythical Full Reserve Lending possibly with Gold Standard will somehow solve all the financial problems. And as long as we have FRL we will also have deposit insurance. We are at mercy of Federal Reserve whether they will bail out FDIC in case FDIC can't satisfy all the claims in case of systematic banking failures.


FRL is okay with interest-bearing accounts because the 'depositor' (investor) is risking his money (slightly) for a (minuscule) return. FDIC not warranted for risk-taking, 'savings' accounts.

Demand deposit account money should go in the vault and remain until the depositor writes a check against it or otherwise withdraws it. FDIC not needed for such 'checking' accounts because there is very little chance of loss and private insurance could easily handle those cases.