How the U.S. Government can help banks raise capital
What if a bank in need of capital could quickly attract a huge amount of deposits from people like you and me by offering something like FDIC-insured five year certificates of deposit (CDs) with market-leading rates? Goldman Sachs was willing to offer Warren Buffet a sweetheart deal for preferred stock with a 10% dividend in exchange for a $5 billion infusion. So why not offer attractive deals like this to anyone with some available cash they're looking to put to work?
A bank in need of cash could do something like the following:
- Offer a 5 year FDIC-insured CD at 7% APY. Make it attractive for the customer to leave their cash in this CD for the entire term by imposing an early withdrawal penalty equal to one year of interest.
- Control costs by offering incentives like a 25 basis point rate increase for customers that fund these CDs electronically and/or online.
- Advertise the hell out of this deal in television, print, and online media.
- Offer this promotion with a fixed end date to encourage prompt investment.
Further, the Federal Government could assist by making savings more tax-favorable:
- Create a provision for a Roth-like savings account (RSA), where all interest income is tax free. Anyone eligible to open an account at a U.S. bank could contribute up to a maximum of $10,000 per calendar year to a RSA regardless of income. The funds in an RSA could be withdrawn by an individual without penalty at any time for any purpose.
- Give interest from non-RSA savings the same tax treatment as dividend payments to the shareholders of a company, capping the tax at the 15 percent rate for most individual taxpayers instead of treating it as regular income.