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January/February 1993, 
Vol. 75, No. 1
Posted 1993-01-01

Banking without Tax-Backed Deposit Insurance

by J. Huston McCulloch

Traditional banks and thrift institutions are beset by two special problems that most other firms do not confront. The first special problem in the extreme mismatching of maturities by thrift institutions. Until recently, these institutions were expected and even encouraged to finance 30-year fixed-rate mortgages by accepting savings deposits with maturities of virtually zero. The second special problem is the tendency for institutions that offer checkable deposits to be subject to liquidity crises unless the deposits are backed 100 percent by reserves. These problems motivated policymakers to introduce federal deposit insurance. During the past three decades, however, financial institutions have developed means of solving these two special problems without government intervention.