Article Image

IPFS News Link • Central Banks/Banking

Fixing Banks. It's Not That Complicated.

•, Axel Merk

They are not that complicated. Yet, as in 2008, we are barking up the wrong trees. In 2008, we missed a major opportunity to fix some core issues. To get a more robust financial system, we must set the right incentives. Let's not waste another crisis, please join me in speaking up.

FDIC further erodes discipline

One reason expanded FDIC insurance is a bad idea is because it takes yet another market-based measure of the health of banks away. That is, aside from the share price, we are then entirely dependent on the wisdom of regulators to keep the banking system safe. It should be apparent that this is a poor approach, but for some reason it is not; and regulators will always fight the last war. In contrast, markets are forward looking. I'm not suggesting we don't need regulations, but we need a healthy mix, and the pendulum has swung way too far. Notably, all but eliminating intra-bank lending in 2008 (by paying interest on deposits at the Federal Reserve ("Fed")) has taken away an important market-based metric to assess bank health. What happens when we eliminate the market from telling us how healthy banks are? In my assessment, it will suggest that everyone will feel safe until a dam breaks, then all hell breaks loose. Sound familiar?