As Simon White writes today, "a full guarantee of all bank deposits would spell the end of moral hazard disciplining banks and mark the final chapter of the dollar's multi-decade debasement." And yet that's where we are headed, even if with a few hiccups along the way, because as White also notes, with the latest banking crisis in the US, it's the clean-up that could end up doing far more lasting damage.
Realizing it's just a matter of time before the next systemic crisis tips the banking sector over, over the weekend, a coalition of midsize US banks asked federal regulators to extend FDIC deposit insurance for the next two years, so as to alleviate any fears which could result in a wider deposit run on regional and community banks.
What would deposit insurance of all $18 trillion US deposits - not just the $11 or so trillion in deposits that are currently "Insured" by the FDIC - look like? As BofA's rates strategist Mark Cabana writes, deposit insurance has been a very effective solution to stabilize deposit outflows historically.
If policymakers consider extending deposit insurance coverage it would impact reserves held in the Deposit Insurance Fund.
The total expanded DIF amount of $230 billion would be insufficient to bail out the uninsured depositors of even one TBTF bank like JPM. In fact, if all deposit insurance had to be used, it would mean the US government somehow has to fund a total of $18 trillion in deposits, an amount equal to 75% of US GDP. It's ain't happening.
Is any of this a viable option? While we are skeptical confidence can be restored with some accounting sleight of hand, Mark Cabana is optimistic and sees deposit insurance as one way for policymakers and the banking industry to address sensitivity among deposit customers.
Ultimately, deposit insurance only mitigates banks' vulnerability to bank runs; it does not insulate them from liquidity or insolvency risk; and it certainly does not "Insure" that a full-scale bank run will see every depositors' money made whole: after all there is just $128BN in the DIF and there are $10 trillion in insured deposits.
https://www.zerohedge.com/markets/math-behind-deposit-insurance-and-why-its-beginning-end
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