The writer is the former chair of the FDIC and author of the upcoming book How Not to Lose a Million Dollars
Government deposit insurance schemes are said to reduce market discipline. With their money guaranteed by the government, depositors have no incentive to scrutinise banks for financial soundness.
Yet, there is greater moral hazard when depositors forgo due diligence and simply put their money into mega banks deemed “too big to fail”. This makes it harder for the US’s unique system of thousands of community and regional banks to attract deposits and play a critical role in lending to new and growing businesses. The US needs to fight fire with fire through targeted increases in deposit insurance limits.
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