In the United States, the FDIC insures US bank deposits for 100% of their value up to $250K per account. In the current system, there is minimal benefit for a depositor to consider a bank’s stability when they choose a bank. If the bank blows up, they’ll at least get their full deposit back. This means that there’s no feedback loop guiding banks towards behaving well. And there’s a moral hazard that dumps this potential expense onto taxpayers, as well as depositors at well-behaved banks.

Imagine instead that the FDIC only insures 95% of the bank account value, so that depositors do have some ‘skin in the game’. Imagine if the amount insured (starting at 95%) drops one percentage point each year in the future, so that there is more skin in the game over time and a better feedback loop. This can guide banks to behave well under the competitive pressure of consumers starting to pay attention to the solidity of the banks they choose. This will create a feedback loop for banks to have more transparent financials and reduce their exposure to fat tail risks.

This will in turn result in a less fragile banking system.

Adrian Scott is a pioneer of social networking, having founded Ryze. He was also a founding investor in Napster. He currently helps companies build & ship technology and grow their metrics, as CEO of Coderbuddy.

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