“Deposit insurance has been the most sacrosanct component of the regulatory regime for banks since it was widely introduced during the 1970s following the collapse of the Bretton Woods regime. However, while it seeks to protect consumers against the undercapitalisation of banks and their tendency to collapse in times of stress, it has also encouraged such undercapitalisation.
Since the early 1970s, the number of countries with government insurance of customer deposits has increased tenfold while the number of banking crises worldwide has risen by a factor of almost 500 compared with the preceding 25 years. Deposit insurance subsidises an already cheap form of debt whose supply is almost unlimited for banks. Banks have therefore been able to operate at very high levels of leverage with very limited constraints on growth.
This has been associated with more, and more severe, banking crises over time. In response, the regulatory apparatus which is designed to protect the sovereign backstop has become extraordinarily extensive and complex, blurring the boundary between the state and the private sector while contributing to the detrimental behaviour by all protagonists that has led to these banking crises.”
To read the full article, visit the City AM website.
Date Added: Thursday 21st January 2016