In the past, I’ve argued that we should consider paring back or eliminating deposit insurance and replacing it with postal savings accounts designed to meet the needs of risk-averse small savers:
As I suggested last week, Steve Randy Waldman’s call for a reform of deposit insurance is one way forward: provide large depositors with a powerful incentive to monitor the financial health of the banks. But another way to go, one that’s not incompatible with that approach, is simply to offer postal savings accounts with “vanilla” features, and allow the private financial firms do what they’d like. Rather than have the public subsidize for-profit firms, we’d create a “public option.” Many will object to this as statist. But is it actually less statist than pervasive state guarantees for virtually all firms? The idea is to make the subsidy narrow and explicit. The public “vanilla” products would presumably be less attractive than private products in many respects — they’d just be less risky.
Recently, I came upon a 1908 speech by William Howard Taft advocating postal savings accounts and making the case against the Democratic call for deposit insurance:
No one can foresee the burden which under this system would be imposed upon the sound and conservative bankers of this country by this obligation to make good the losses caused by the reckless, speculative, and dishonest men who would be enabled to secure deposits under this system on the faith of the proposed insurance because in its present case the proposal would remove all safeguards against recklessness in banking and the chief and probably in the end the only benefit will accrue to the speculator, who would be delighted to enter the banking business when he is certain that he could enjoy any profit that would accrue while the risk would have to be assumed by his honest and hard-working fellows. In short, the proposal is wholly impracticable unless it is to be accompanied by a complete revolution in our banking system, with a supervision so close as to practically create a government bank.
And Taft’s case for postal savings accounts is also rock-solid.
That last line from Taft reminds me of Charles Calomiris’s observation that the expansion of deposit insurance has meant an overreliance on regulators. Before deposit insurance, depositors would also have an interest in restraining the riskiness of the banks that hold their money. Now, however, virtually all depositors are protected, and the ownership of banks is highly fragmented — so much so that very few investors have the kind of sustained relationship they’d need to exert meaningful pressure.