Bring Back Boring Banks

Bring Back Boring Banks
By AMAR BHIDÉ
Published: January 3, 2012

http://www.nytimes.com/2012/01/04/opinion/bring-back-boring-banks.html?_r=1&ref=contributors

CENTRAL bankers barely averted a financial panic before Christmas by replacing hundreds of billions of dollars of deposits fleeing European banks. But confidence in the global banking system remains dangerously low. To prevent the next panic, it’s not enough to rely on emergency actions by the Federal Reserve and the European Central Bank. Instead, governments should fully guarantee all bank deposits — and impose much tighter restrictions on risk-taking by banks. Banks should be forced to shed activities like derivatives trading that regulators cannot easily examine.

The Dodd-Frank financial reform act of 2010 did nothing to secure large deposits and very little to curtail risk-taking by banks. It was a missed opportunity to fix a regulatory effort that goes back nearly 150 years.

Before the Civil War, the United States did not have a public currency. Each bank issued its own notes that it promised to redeem with gold and silver. When confidence in banks ebbed, people would rush to exchange notes for coins. If banks ran out of coins, their notes would become worthless.

In 1863, Congress created a uniform, government-issued currency to end panicky redemptions of the notes issued by banks. But it didn’t stop bank runs because people began to use bank accounts, instead of paper currency, to store funds and make payments. Now, during panics, depositors would scramble to turn their account balances into government-issued currency (instead of converting bank notes into gold).

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