Saturday, 5 September 2015

Charging banks for deposit insurance.

George Osborne's latest stroke of genius is to have banks pay for deposit insurance via increased profits tax on banks: that is, banks pay a higher rate of corporation tax than non-bank corporations.

Now normally with insurance policies, you pay an annual premium every year, REGARDLESS of whether you make a profit or not, and quite right. For example, the insurance firms that insure bank buildings against fire do not abstain from collecting premiums just because banks haven’t made a profit recently.

Indeed, in the case of deposit insurance and so on in the case of banks it’s PRECISELY banks which make losses which are the biggest risks. Thus if anything, they ought to pay larger premiums.

But of course that would tend to drive weaker banks to the wall more quickly, and if there’s one thing Britain’s elite doesn’t want, it’s any disturbance of the status quo. Wall paper must under no circumstances be removed where cracks have been papered over.

In fact it shouldn’t be difficult to close down a bank and have a stronger bank take over the assets and liabilities of the failed bank. In the US, small banks fail at the rate of at least one a month. The FDIC moves in, closes it down, and has some other bank take over assets and liabilities. No problem.

As Walter Bagehot put it: “…any aid to a present bad bank is the surest mode of preventing the establishment of a future good bank.”

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