FDIC Deposit Insurance: A Blast From the Past

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 |  Includes: KBE, KRE, XLF
by: Kid Dynamite
I'd be surprised if anyone thought that banks would be happier without deposit insurance these days. We (they!) need deposit insurance to avoid panic and bank runs when depositors get nervous, and we need it now more than ever because of the highly suspicious state of the banks' balance sheets, and the increasingly levered nature of our financial world (compared to that of prior generations).
Thus, I found Paul Kedrosky's link yesterday, to the 1933 TIME magazine reaction to the initial instituting of deposit insurance, to be fascinating (emphasis mine):

Through the great banking houses of Manhattan last week ran wild-eyed alarm. Big bankers stared at one another in anger and astonishment. A bill just passed by both houses of Congress would rivet upon their institutions what they considered a monstrous system of guaranteeing bank deposits. Such a system, they felt, would not only rob them of their pride of profession but would reduce all U. S. banking to its lowest level. They saw their deposits which they had spent a lifetime to build up and protect with their good names confiscated by the Government to pay for the mistakes and dishonesty of every smalltown bankster.


Amazing, isn't it? Initially, the bankers hated the insurance, because they had worked hard to build up their reputations for excellence, and the insurance leveled the playing field so that every bank could simply buy the equivalent of that reputation by paying a small fee to the FDIC. Moreover, the big banks felt they didn't need to pay the fee, because they didn't need the insurance in the first place - they viewed it as a confiscation of both their reputational and monetary wealth to redistribute to the smaller banks!
My how times have changed...

Disclosures: Short XLF, long insured deposits