"Regarding your editorial "The Easy-Money Lesson of First Republic" (April 26): Why do governments still allow banks to use depositor money to fund investments that have become increasingly risky and opaque, and are for the benefit of bank shareholders?
Bank depositors take on significant risk, which they are not equipped to understand, with limited to no upside. They do so because there is an implicit guarantee that taxpayers will bail them out.
Each rescue reinforces this, which leads to reckless risk-taking by banks. To unwind this bad incentive, governments shouldn't allow banks to use depositor money as a source of funding. Governments can offer deposit insurance as a quid pro quo.
If depositors want a return on their money, they could forego this insurance and choose from an array of bank-offered investment options. Risks could range from low, such as a basket of government-issued debt, to as high as a customer wants. That investment should be owned by the customer, not the bank, which can charge fees for the service.
This would turn federally insured banks into custodians of their customers' money instead of speculators with it. Banks that don't agree to these restrictions could continue with the status quo, but should be required to disclose to its depositors that their money is uninsured, and therefore at risk, and will be used to fund the banks' investment portfolios.
Surely depositors would move away from the latter, with the bad incentives removed. The taxpayer would certainly appreciate it.
Trent Hudson
Houston" [1]
1. Banking System's Incentives Are All Wrong
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 01 May 2023: A.18.
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