Abstract
The current system of deposit insurance has a basic structural problem because there is a mismatch between the deposits insured by the FDIC and the “opaque” and illiquid bank loans used to collateralize those insured deposits. There may have been, at one time, synergy created by using insured deposits as the primary source to finance the commercial lensing activities of banks, but we see no evidence that such benefits, if any, exist in today's financial system. There are, however, significant costs for maintining the current institutional structure. We conclude that an efficient solution is for commercial lending to be financed by standard instruments such as debt, preferred stock, and equity, and that deposit with U.S. Treasury bills or their equivalent.
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