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Dangers of unlimited deposit insurance.

 

In response to the FDIC's (US) request for comment on it's proposed implementation of Section 343 of Dodd Frank (unlimited deposit insurance on corporate non-interest bearing accounts), Treasury Strategies highlighted several shortcomings  and offered three recommendations to mitigate some of the potentially destabilizing elements of the Act.

 

The move to provide unlimited deposit insurance to all banking institutions for a two year period poses several key risks to the U.S. banking system and, by extension, the economy. In short, it:

 

• Is unnecessary

• Duplicates other U.S. and global efforts to regulate banks

• Raises costs for consumers and businesses

• Nationalizes the cost of bank liquidity, transforming a “run on the bank” to a “run within the bank”

• Disadvantages money market mutual funds

• Substitutes FDIC assurances for bank capital

• Exacerbates the “too big to fail” problem

• Reduces the net stable funding within the banking system

 

Our recommendations are outlined our comment letter at   http://www.tinyurl.com/TreasuryStrategies0721

 

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