That is the contentious title of a new paper from Philip Z. Maymin and Zakhar G. Maymin, which is significantly less contentious than their abstract:
We show that any objective risk measurement algorithm mandated by central banks for regulated financial entities will result in more risk being taken on by those financial entities than would otherwise be the case… This result leaves three directions for the future of financial regulation: continue regulating by enforcing risk measurement algorithms at the cost of occasional severe crises, regulate more severely and subjectively by fully nationalizing all financial entities, or abolish all central banking regulations including deposit insurance..
It is my admittedly casual observation that a bipartisan majority of economists believe that the creation of the FDIC has played a large part in the lack of bank runs that we’ve had in the latter 2/3 of the 20th century. Milton Friedman even suggested as much in A Monetary History of the United States:
Major changes in both the banking structure and the monetary system resulted from the Great Contraction. In banking, the major change was the enactment of federal deposit insurance in 1934. This probably has succeeded, where the Federal Reserve Act failed, in rendering it impossible for a loss of public confidence in some banks to produce a widespread banking panic involving severe downward pressure on the stock of money; if so, it is of the greatest importance for the subsequent monetary history of the United States. Since the establishment of the Federal Deposit Insurance Corporation, bank failures have become a rarity.
Although I also believe he backed away from this somewhat later in life. And there are certainly economists, including Charles Calomiris, who have agreed with what these guys are saying about deposit insurance making things worse. This paper does make this interesting point:
…the number one response consumers cited as the most important reason for choosing their primary financial institution was the location of the bank’s offices, with more than 40 percent of respondents indicating geographical convenience as their most important reason. The second and third most popular reasons were low fees and the ability to obtain many services at one place, at about 15 percent response each. Safety and the absence of risk were listed as next to last, at only 2 percent on average. In short, with deposit insurance, consumers are indifferent as to the particular risk each bank runs.
I mean, if you were a bank and this is how your customers thought, how would that make you behave with respect to risk?
Still, I haven’t yet read an argument persuasive enough to overturn my deference to the consensus (the consensus I perceive anyway) of economists on this issue.