Bankers should recall purpose of deposit insurance

Northwestern Financial Review, Dec 1-Dec 14, 2002 by Bengtson, Tom

What should bankers consider as they debate deposit insurance coverage?

My feeling is that we should start by considering the original missions of the FDIC. There were two:

One was to protect the little guy's rent and grocery money. That's been achieved. There is nothing you can do to achieve it any further. In fact, you can reduce coverage to $50,000 and you'd still be protecting the little guy. The second mission was to preserve community banking. If you go back and study the debates over the establishment of the FDIC, you discover that relatively little was said about protecting the little guy's deposits. But what was very clear was the desire to protect the community banking system. I happen to think we have a unique banking structure and we should preserve it.

State sponsored deposit insurance plans prior to 1933 had all covered 100 percent of deposits. That was standard, although some limits were placed on extending coverage to certain types of interest-paying deposits. Instead of using any of the old systems, President Roosevelt proposed a dollar ceiling of $2,500 - that was the amount you could get covered in the postal savings system. Vice President John Garner was very much in favor of deposit insurance, while Franklin Roosevelt opposed it. Garner reputedly told Roosevelt: "If you don't get something through on deposit insurance you are going to have to get 5,000 new postal clerks." Everyone was taking their money out of banks - including perfectly sound ones - and putting it where they knew it was safe, which was the postal savings system. Roosevelt, I guess, said: "All right, let's do the same thing; let's insure up to $2,500."

Insuring, of course, is the wrong word. We don't have deposit insurance; we never have. It's a guarantee by the federal government. But so many state plans had failed by 1933, all of which were called guarantee plans, the federal government didn't want to use that term, substituting instead "deposit insurance."

Do you believe community banking is solid in the U.S.?

No other country in the world has what we have. It came out of a huge fight over the role of a central bank. How much power should it have? That was settled in 1832. President Andrew Jackson thought the central bank had far too much power and he abolished it, and it didn't exist again until 1913, with the creation of the Fed. But the fight earlier was over who should be permitted to do banking. New York broke the logjam and said, "everyone." So they passed the Free Banking Act in 1838 that said anyone was qualified to apply for a bank charter. I don't think that any other country had a rule quite like that. It swept like wildfire through the USA, state after state. Then the Federal government adopted the National Bank Act because it wanted to provide charters too, and also wanted to get rid of the state-chartered banks because they issued currency. Congress said: "you can't issue currency anymore." It thought this would put state banks out of business but it didn't. It put state banks in the demand deposit/check writing business, which was superior to what the national banks were offering.

Consider the fact that Nebraska has 274 banks today. That's probably more commercial banks than exist in Canada, Great Britain, France, Belgium, Holland and Denmark combined. The interesting thing about that is that we've always had people who say the United States is over-banked. But our system - fragmented as it was with lots of little banks all over the place - had the greatest economic advance in history, over the last century and a half. I'm not so sure any other country can make that claim.

What is your assessment of the Gramm-Leach-Bliley era?

I regard GLB, in terms of modernization, a useful, but hardly necessary, Act. It didn't really touch the GlassSteagall Act. The core of that Act is exactly the way it was before. It is still against the law for a commercial bank to do an investment banking business. That hasn't changed. But it doesn't mean anything any more because they can do all that through affiliates or subsidiaries.

One thing Gramm-Leach-Bliley sought to do was to move the Fed into a position of dominance as the umbrella supervisor. And what that really means, we still don't know.

Carter H. Golembe of Delray Beach, Fla., published The Golembe Reports for many years.