“The recent action by a consortium of banks to deposit money in First Republic Bank harkens back to an earlier attempt to counter bank runs: the U.S. Postal Savings system,” and gerbil-like banking, writes Maureen O’Hara at the Economic Development Partnership of North Carolina.
There was a Panic in 1907, and the banking system collapsed. The government came up with the idea of a US Postal Savings system.
Post Offices would take deposits for a slightly lower interest rate. The Postal service then put the money back into the banks. It was a gerbil-like banking system, explains Maureen O’Hara is the Purcell Professor of Finance at the Johnson College of Business, Cornell University.
Things changed with the 1929 crash, and the FDIC was born.
She said the “gerbil lives again.” Only now it’s different since some banks are now viewed as too big to fail. So, as in the First Republic bank collapse, other banks formed a coalition and put the money back into First Republic. It’s a short-lived answer, although, she says, an admirable one.
The FDIC is now considering no limits on the amount the government [taxpayer] will pay out.
The FDIC’s willingness to deviate from its stated level when the need arises underscores the arbitrary nature of this guarantee limit. O’Hara said it’s time to look at this issue.