Bank runs stopped for almost 90 years, most banks were consistently profitable, failures were rare, and, as the FDIC proudly states, “no insured depositor has lost a penny.” Losses were repaid through assessments on banks, and the prevailing view was that the theoretical problems of moral hazard and “private gains-public losses” were largely contained. Banks effectively became private/public hybrids, with a federal deposit backstop and comprehensive regulation combined with private capital to enable banks to fulfil their critical role in maturity transformation with relative efficiency.įor a long time, it seemed as if this private/public system worked perfectly. developed a comprehensive system of bank regulation to complement deposit insurance, including strict separation of banking from securities and other commercial activities. The guaranty was originally for up to $2,500 per eligible account – an amount quickly raised to $5,000 or about $112,000 in today’s dollars – and subsequently raised six times over the years to the current $250,000 limit.Īt the same time, the U.S. But the Great Depression was the trigger for a seismic change.Ĭongress created the Federal Deposit Insurance Corporation (FDIC) during the Great Depression to stop the rolling banking panic by guaranteeing bank deposits. Depositors lost everything every time a bank failed. The financial panics of 1819, 1837, 1873, 1907, and 1931-32 all sparked banking crises, recessions, or full-scale depressions. banking has always been a risky business.
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