Privatizing deposit insurance: Is that what Cyprus is about?

[Newsjock]

http://finance.yahoo.com/blogs/the-exchange/does-cyprus-bail-open-door-private-deposit-insurance-211902028.html

... Given the German attitude and the Dutchman’s new powers, what are depositors to do to protect themselves? Despite what the Dutchman said, most of them, except for sophisticated financial corporations, really don’t have the ability to conduct their own “stress tests” on every bank they might favor with their friendly cash. They could demand more interest for their risk of confiscation, but that would hardly be enough to cover losses like the Cypriot depositors are suffering. But their dilemma does open the door to creation of a whole new branch of the insurance industry – private deposit insurance.

Big league insurance companies could perform the stress tests needed to certify that a particular bank represent an acceptably low degree (or not) of “bail-in confiscation risk.” They can hire and direct bank examiner types (at higher than government pay) to in effect provide a form of rating analogous to those used by public bondholders; even better in terms of objectivity, they could be paid by fees from large depositors, not the banks. For big depositors, the fees would be offset by demanding higher interest from the banks – a match with economic symmetry.

If such a “free-market” deposit insurance scheme were to take hold, the Dutch Finance Minister might even live to see his now infamous interview inscribed on the walls of some future Germanic Hayek Hall. It would not be the first mistake in European policy that turned out to be a prediction of things to come. And governments and even central bankers might be able to get out of the “stress-test” business (nobody really trusts theirs, anyway). The Dutchman’s Bazooka “template” might never even have to be fired. And rich Russians might someday bank with the Vatican, which still keeps its faith in the euro.