A Serious Moral Hazard in the Banking System

In a market where one group is more subsidized than the other, you can be sure of who won’t survive

Letter to The WSJ. 

"Treasury Secretary Scott Bessent and Sen. Bill Hagerty (R., Tenn.) write that raising the Federal Deposit Insurance Corp. limit to $10 million would put regional and community banks on an even playing field with larger institutions (Letters, Oct. 31). Your Oct. 20 editorial “How to Make Banks Less Safe” argues that such an expansion would put the average taxpayer at greater risk should a bank fail. You both have a point.

Deposit insurance does create moral hazard within the banking system. Yet the application of market discipline to banking is so little practiced that it no longer plays a significant role in disciplining the industry. For a majority of banks, profits are privatized and losses likely to be socialized.

As we learned in 2008-09 and again in 2023, the government will pay the uninsured depositor at failed banks with more than $100 billion in assets par value. This guarantee covers the banks that have nearly 70% of all assets and leaves a serious moral hazard issue that isn’t being addressed. It also leaves only 30% of the industry subject to market discipline.

In a market where one group is more subsidized than the other, you can be pretty confident about who won’t survive.

Thomas Hoenig

Kansas City, Mo.

Mr. Hoenig was vice chairman of the FDIC (2012-18)."