Could a Private Bank Deposit Insurance System Work?
Passell, Peter, THE JOURNAL RECORD
Could Uncle Sam again be caught holding the bag in a banking scam on the scale of the savings and loan debacle?
Knock on wood, probably not.
Last year Congress ordered federal deposit insurers to take over ailing banks before the institutions managed to throw good taxpayer money after their own bad debts. And under rules that go into effect next year, banks that are inclined to take chances will be obliged to buffer the risk with more capital.
But safety is only half the deposit insurance story; the other half is efficiency. While the United States Treasury is now better armored against assaults from future Charles Keatings, deposit insurance remains a crude regulatory tool that only a bureaucrat could love.
Federal regulators must still make subjective calls about when to padlock the doors on friendly neighborhood banks. Moreover, insurance premiums still do not mirror the risks of individual bank portfolios, a failure that implicitly subsidizes the high rollers. It is no surprise, then, that many economists see deposit insurance as a necessary evil, the inevitable price of securing the national money supply.
Many, but not all. Bert Ely, who runs Ely & Co., a consulting firm in Alexandria, Va., thinks he knows a better way: private deposit insurance.
And he has found an patron in Thomas Petri, a Republican congressman from Wisconsin with a soft spot for smart schemes to buy better government for less money.
The banking industry already insures itself. Premiums go into a pool, with the proceeds dedicated to making good on individual banks' promises to depositors. But civil servants, not the contributors, are in charge of setting premiums and keeping banks on the straight and narrow. And without a market to discipline the process, regulators are unlikely to make economically rational decisions.
That is where the Ely-Petri plan fits in. It would eliminate the middleman, converting deposit insurance into a true industrywide self-insurance plan. Banks would be required to obtain insurance from syndicates of other banks and perhaps other financial institutions with deep pockets. The syndicates, in turn, would be required to reinsure with other syndicates against losses of a magnitude that could wipethem out. And to cope with the incredibly unlikely event of the whole system running through its capital, the government would reinsure the reinsurers.
Syndicates, managed by professional agents, would set premiums at any level they wished and negotiate their own criteria for withdrawing coverage _ much the way a fire insurer deals with corporate policyholders. …