Monday, December 12, 2011

Is PNC taking your money to Pennsylvania?

Government officials in Latvia and Sweden are blaming Twitter for a weekend run on two Swedish banks in Latvia after "tweets" claimed Swedish officials were about to close the banks and leave depositors empty handed.

Twitter is not to blame; government bank deposit insurance is.

Think about it. If a rumor spread in Kentucky that Pennsylvania-based PNC Bank would shut its branches here and take all its depositors' money back to Pennsylvania, how would a lot of people react? You know it would get ugly.

The point is that government deposit insurance has made banking consumers all over the world dumber than they should be and subject to freaking out when presented with rumors like this.

The flip side of a false sense of security is a susceptibility to unwarranted panic. In addition to protecting taxpayers from huge amounts of moral hazard, ending government deposit insurance would force bank customers to educate themselves about the health of their bank.

At a time in which the world is growing keenly aware of the devastation caused by banking crises, that would be a good thing.