Magazine article American Banker

Private Insurance Pushed for Up to 5% of Bank Deposits

Magazine article American Banker

Private Insurance Pushed for Up to 5% of Bank Deposits

Article excerpt

By JARET SEIBERG Renewing his fight against the "too big to fail" doctrine, Federal Reserve Bank of Minneapolis President Gary H. Stern is urging lawmakers to require banks to privately insure some deposits. Private insurers, which would cover up to 5% of deposits, would scrutinize a bank's investment strategies and set rates depending upon the amount of risk a bank has incurred, Mr. Stern said. This should discourage banks from acting recklessly, he said. Private companies or individual investors could provide the insurance, he said. "There is a compelling need to adopt policies that dampen the incentive to take on too much risk," Mr. Stern said Friday at the Economic Education Winter Institute in St. Cloud, Minn. Mr. Stern opposed completely privatizing deposit insurance, saying only a federal government-sponsored safety net can eliminate the instability and economic costs of bank panics. The limited private insurance proposal received cautious support from the industry. "This is an idea that deserves more exploration," said Richard M. Whiting, acting director of the Bankers Roundtable. "We need to get increased market discipline into the process." Private insurance was one of three ideas Mr. Stern touted to combat "too big to fail," which is the belief that some banks are so large that the government must cover all their debts, including deposits above $100,000, to avoid a financial panic. Some worry that this implicit government guarantee encourages large banks to take excessive risks. …

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