With its history of reactionary policies, the FDIC has played a significant role in a variety of industry failures.
Question: Do you agree with those that recommend eliminating deposit insurance?
John Allison: I totally agree and I think getting rid of deposit insurance would be wonderful. In fact, 10, 15 years ago, the financial services roundtable actually went through an exercise looking at a cross guarantee program among the large financial institutions. I believe that if we put that program in place, similar to what happens with the insurance industry, what the brokerage industry has, we would never have had, even with the Federal Reserve, even with Freddie Mac and Fannie Mae, we certainly wouldn’t have had a misallocation of the magnitude we had. Deposit insurance played a huge role in the big failures, in the Golden West, in the Countrywides, in Washington Mutual, etc., etc. And the reason for that is the FDIC, this is my experience of that career, in good times, they don’t really impose any kind of discipline, and then in bad times they overreact. Right now, the FDIC is tightening like crazy, making it much harder to make loans. Now, they say they want you to make loans, but they really don’t, because the local examiner, all he can do, all that can happen to him is his bank can get in trouble.
So the FDIC and the federal examiners are tightening bank standards now, after the horse is out of the barn. In the good times, they weren’t really paying any attention. We’ve taken over some failed institutions and it was obvious in these cases that these people were making bad loans, good examiners would’ve shown that, but they don’t act until after the fact. If we had a co-insurance pool, where the banks really were taking the risk, we would be far more disciplined to make sure the companies that were in our co-insurance pool had enough capital and had the proper kind of risk standards. So I’d vote to get rid of FDIC insurance, not that we don’t need it, we need some kind of insurance, but I think it ought to be an industry-based, industry-controlled pool where we would have a huge motivation to discipline all the participants in the pool.