The mainstream debate (ie not the one usually happening here) about government guarantees for bank deposits seems to hinge around two key variables.
- How much of a bank account should get the guarantee.
- Who should pay for the guarantee.
Turnbull proposed a guarantee that applied only to the first $100k of bank accounts. Rudd implemented a guarantee of an unlimited amount. Rudd then said that for large accounts the account holders should be made to pay for this compulsory insurance whilst Turnbull cried fowl.
Whilst I haven’t thought this through in detail it would seem that there is scope for debate around another variable. And that is the proportion of bank accounts that receives a guarantee. For instance instead of an explicit guarantee of 100% of bank deposits the government could have guaranteed 90% of the amount kept in a bank account. (Or 1% if it wanted to make explicit the fact that there wasn’t much of a guarantee from the government at all).
What would be the upside and the downside of a government guarantee on bank accounts that was less than 100 percent?