#premiums

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.

This trade-off was most recently addressed last week by John Vickers, a former U.K. regulator.  Commenting on proposals across the pond akin to those in the U.S. to expand the sovereign deposit backstop, Mr. Vickers cautioned that added coverage should come with higher regulatory capital to ensure that banks do not take undue advantage of the comfy quilt into which the current, porous safety net would be transformed.

The U.K. deposit insurance system is different than that in the U.S., most notably by the absence of costly, ex ante bank premiums for the privilege of deposit-insurance coverage.  However, the U.S. risk-based premium system that sets bank premium payments is asset – not insured deposit – based.  As a result, coverage could go up considerably …