The Price of Higher FDIC Protection and How to Prevent It

Last week’s memo stirred up a lot of comment about ways to provide at least some private-sector deposit insurance.  The consensus is that, while nothing is easy about a private-sector backstop for federal coverage, the concept warrants careful consideration because all the other reform ideas on their own are still more problematic.  This isn’t just because proposals for expanded federal coverage – my own included – extend the federal safety net at resulting moral hazard.  In some cases, as I said, this risk is worth taking because some depositors warrant protection.  Still, there’s sure to be a price for more federal coverage – super-costly premiums and/or more bank regulation – that argue for market-based solutions to the greatest extent compatible with social welfare and stable finance.