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Bank Deposit Guarantees: Why Not Trust the Market?
by Kenneth J. Robinson
Eugenia D. Short
Despite several recent pieces of banking reform legislation, the U.S. banking system has yet to develop an institutional framework to compete effectively in the global economy. The authors argue that bank deposit insurance has actually increased risky, imprudent banking practices by relieving banks of many of the consequences of such practices. Further, bank deposit guarantees distort the marketplace by allowing weaker, undercapitalized banks to survive even though they are not economically viable. The authors assert that full banking deregulation, coupled with the elimination of federal deposit insurance, would dramatically improve the safety and soundness of the banking system.