banking

FDIC insurance: You can bank on it

What do you think of the temporary unlimited deposit insurance coverage in the Dodd-Frank Wall Street Reform and Consumer Protection Act?

This particular section of the act revises the FDIC's deposit insurance regulations to now embrace noninterest-bearing transaction accounts, such as a checking account, as a new deposit insurance account category. All funds are fully insured, without limit, and the coverage is separate from the normal coverage provided to depositors for other accounts at an insured depository institution. This section of the Act is temporary and set to expire Dec. 31 of this year. I think it is important to note this was not a new program but in actuality continued coverage that was instituted on an emergency basis in October 2008 under the Transaction Account Guarantee Program, or TAGP, in an effort to stabilize the financial system.

As you are aware, specific elements of Dodd-Frank were controversial and some have argued this section simply attempts to bring the various nonbanking financial industries under a more uniform set of regulations overseen in part by the Federal Reserve. Even though this extension of TAGP was employed to reduce consumer uncertainty and rebuild confidence in the financial system, I have concerns of possible unintended consequences when unlimited deposit insurance coverage is provided and how providing such coverage for these accounts actually promotes moral hazard.

I believe that moral hazard played a central role in the events leading up to the financial crisis and if future reforms are to be well-designed and crafted to prevent further disasters, we must understand that moral hazard is fundamental to understanding how the economy works. Moral hazard involves increased risk-taking, and if I assume both the risk and associated consequences of my uncertain actions, I will act more conscientiously.

Some would argue that these noninterest-bearing accounts are the safest possible and their associated risk low. But prior to 2008, home investments were also considered a low risk and we found out differently. As confidence in the system increases, the need for renewing this section will diminish but my real concern resides outside consumer sureness and instead focuses on moral hazard.

Special thanks to Tom Pieplow, associate professor of management at Athens State University in Athens, Ala., for joining us in the interview.

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