Another News Article Covering the Fight for US Deposits

The next thing you know the banks will want the government to establish a maximum rate that can be paid on savings accounts -- regulation when it suits their needs!

Amen, Banking Guy! Those who behave appropriately (competitive deals that merit mention on your site) can be assured of our support. The others, with their paltry 1% rates, deserve none.

I have a dim recollection that the government DID establish a maximum interest rate when new types of savings accounts were brought out - perhaps in the 70s? NOW accounts?

Shame on any successful bank for selfishly criticizing a bank that is willing to pay a higher rate to get deposits.

If these successful banks had it their way, every bank and credit union would pay only rates equal to their paltry rates.

And then what would happen?

The biggest banks would get 100% of the deposits?

Angry.

The insane interest rates are the interest rates that banks charge on their credit card balances.

Well, without the FDIC skewing things by making deposting in failing banks "safe," they wouldn't be getting our deposits. I agree, it's nice that banks offer high rates and I chase them like everyone else here, but it's artificial and due to government meddling. I would never put money in GMAC Bank w/o FDIC coverage even if they offered 10%.

These big banks are paying us less than paying the Fed or other banks.

The LIBOR, rate banks charge each other, for 3-months was 2.24% yesterday.

We would be stupid to lend them our deposits for less than they charge each other.

I agree with Jim. The FDIC skews things so that failing banks can offer higher rates. Without the FDIC, we would be running to put our deposits in Bank of America and Chase because of their security, even with the paltry rates. But today we chase the higher rates without any regard to the bank's security, and the banks have a point that it's anti-competitive. With that said, some non-failing safe banks just trying to grow market share do offer higher yields as well...

The bigger banks want lower rates because it makes them more money and helps pay for their gleaming skyscrapers and corporate jets. But it doesn't mean we as consumers need to put our money in their institutions. Thanks goodness for competition.

"The FDIC skews things so that failing banks can offer higher rates."

There are plenty of healthy banks that are offering competitive rates also.

I have to think that the net effect of FDIC's existence is positive for all banks, failing or not. Banks are not just competing with each other, they're also competing with the mattress fund.

"I have to think that the net effect of FDIC's existence is positive for all banks, failing or not. Banks are not just competing with each other, they're also competing with the mattress fund." - Noah

and

"Well, without the FDIC skewing things by making deposting in failing banks "safe," they wouldn't be getting our deposits. I agree, it's nice that banks offer high rates and I chase them like everyone else here, but it's artificial and due to government meddling. I would never put money in GMAC Bank w/o FDIC coverage even if they offered 10%." - Jim

This is why this issue is actually quite complex and not so black and white--similar to the auto industry bailout.

Just to disclaim, I have an economics background and generally am a liberal Republican in terms of environmental issues but a fiscal conservative. I see Jim's point. I agree with it to a point. In fact, almost every bank and credit union we had funds in had either been taken over by the FDIC or was eaten up by another bank. It's simply amazing. We had GREAT rates in each of those accounts, but almost every single one of them was taken over. I'm frankly amazed. And I admit it was purely due to the FDIC coverage that we were able to deposit our funds in those banks. Otherwise we would definitely have stayed away from many of those banks or CUs, even if they offered 10% as Jim said. So I do see Jim's point and agree with the sentiment.

However, as Noah points out, without FDIC coverage, it certainly would be a net negative for the entire industry. In fact, what we're currently experiencing is exactly the colossal collapse of confidence in the banking and financial industry that would happen on an every day basis if FDIC didn't exist. It's interesting to note that during this crisis, the FDIC increased the $100,000 coverage limit to $250,000 to increase everyone's confidence. Notice they didn't lower it. It would have frozen the "credit" market even more if the lowered the coverage or eliminated it. Just as banks are hording cash like mad, consumers would equally be hording cash, even from BofA, JP Chase, and Citi, if the FDIC didn't exist. Call it a necessary evil if you will, but I do believe it's necessary.

The FDIC has already or is in the process of charging banks different premiums on their coverage based on the strength of the financial institution. So it's definitely going to effect the smaller, riskier banks. We'll see lower overall interest rates I'm sure.

From an end user/saver's perspective, I'll miss the higher rates, but from a broader economic standpoint, I see the necessity in charging the riskier banks more for their FDIC coverage.

--L

What the world might be like if the FDIC didn't exist is, of course, pure speculation.

Another possibility might be that there would be private-sector bank insurance companies. Just like some credit unions have chosen to be insured by ASI (in states where it is allowed) rather than the NCUA, it might be possible that in the absence of the FDIC, other insurance entities or investement vehicles might have arisen.

The insurance paradigm may even have been different. Rather than relying on a bank to insure all of its deposits, it may have been up to each depositor to obtain an insurance policy for their own deposits. Or perhaps something similar to the Credit Default Swap (CDS) market may have developed for bank deposits where you could bet on the chances of a bank defaulting with someone who wanted the risk.

Let me point out that BofA, Chase, and Citi did not spring into life one day as trillion dollar behemoths. Once upon a time, they were little itty-bitty banks, too.

If the FDIC did not exist, would enough people have entrusted them with their deposits to allow them to grow to their present positions?

You can't just say that if the FDIC didn't exist, we'd all be keeping our money in 0.10% savings accounts at BofA. The banking system would have developed in a radically different manner that we can only guess at. It's effects wouldn't just be that today's little banks would be gone but that the same big banks would exist and do business in the same way they do today.

Frugal savers need not apologize for having to fight for every extra fraction of a point we can get. Unlike large-bank CEOs with their lobbyists and gargantuan compensation packages, we can't count on a government bailout in the event of poor performance.

Well, if you didn't have FDIC, but still had fractional reserve banking, yes, you'd always fear a "panic" and bank failures. However, if you had honest money, that wouldn't be a problem. But, honest money is no fun because the bankers couldn't create money out of nothing and then earn interest on it, and the government couldn't spend far beyond its means on guns and butter to run an empire abroad and buy votes domestically. So, given that our fractional banking system is inherently insolvent (and isn't going anywhere w/o an extremely bloody fight), yes, I suppose it's good to have FDIC fooling most people into not worrying about their money and allowing the pyramid scheme to continue (for a while, anyway). Who knows how long it will last, however, and how painful it will be when things fall apart more than they already are. Meanwhile, we just work within the system that exists and take advantage of the socialized risk even if it's a moral hazard, creates all kinds of misallocated investment, etc.

And yes, healthy banks also offer good rates here and there, but that's probably driven by the desire to compete with unsafe banks.

Also, big doesn't necessarily mean safe.

"Also, big doesn't necessarily mean safe."

That's an understatement!