Universal Deposit Insurance

Abstract

I argue that coverage caps on Federal Deposit Insurance (FDI), a vestige of the 1933–2005 era when premia were neither risk-priced nor regularly assessed, have become not only anachronistic—a bank law equivalent of the human tailbone—but dangerous. The failure of Silicon Valley Bank in early March of 2023, followed by more regional bank failures thereafter, shows why. I then show how readily uncapped, progressively tiered, risk-priced FDI can be extended to all banks in a manner lending far greater resilience, at no risk of “bailouts,” to the banking sector. But far more, I argue, will come of this. By eliminating the advantage now held by “Big 4,” generic TBTF Wall Street Banks, the reform will effectively undo a great deal of the 1990s, with all its attendant bank concentration, financialization, and deindustrialization. A revival of regional and sector-specific banking of this kind seems especially fitting as we embark on a grand national project of “Making America Make Again.” An Appendix includes draft legislation now before both Houses of the U.S. Congress.