Government Encourages Greater Moral Hazard by Banks

I received a notice today from the commercial bank with which I do business, as follows:

You may have heard recently that the U.S. Congress approved an increase in FDIC coverage to up to $250,000 per depositor, per institution until December 31, 2009. It is possible to qualify for more than $250,000 in FDIC coverage at the same insured institution if you have deposit accounts in different ownership categories such as single accounts, joint accounts, Individual Retirement Accounts (IRAs), and trust accounts. Additionally, business account deposits at the same institution are insured up to $250,000 and are insured separately from the personal accounts of the entity’s stockholders, partners, or members.

So, besides pressing banks to lend, whether or not they have creditworthy borrowers with whom to transact, the government has relaxed the incentive for depositors to monitor the safety of their bank deposits, and therefore lessened the constraints on reckless behavior by the banks. If my deposits are guaranteed by the government, what do I care whether the bank is behaving foolishly in its lending? It’s not my problem. And if nobody cares whether the bank is acting responsibly in its lending, why shouldn’t the bank shoot the moon, lending to high-risk borrowers at an elevated rate of interest? There’s less need for prudence if the government stands ready to pick up the pieces.

Because I have a personal account and a business account at the bank, I can place $500,000 there with full protection. Now, if only I had $500,000.