Policy Documents

TAG: Phase Out Unlimited Bank Deposit Guarantees

David C. John –
December 10, 2012

Despite its past need, the Transaction Account Guarantee is potentially very dangerous. Transaction accounts can move very quickly. Once interest rates start to rise (as they inevitably will), corporations could move their money into interest-bearing accounts or other investments, leaving banks that depend on these deposits to finance lending in serious trouble. The sooner this market distortion ends—responsibly—the better. However, the legitimate concerns of smaller banks need to be taken into consideration when a decision is made.