We don’t live in a socialist society. These companies chose not to diversify their risk. If they didn’t know their accounts had a max insurance rating of $250k, then they deserve to fold.
FDIC insurance is intended for consumers not to be instantly without. If you are a corporation, you are responsible for you own financial risk.
9 banks have failed in the last 5 years. The fed is treating this special and that’s why it’s an issue. Essentially they are telling the public “as long as you are with a large bank that holds large assets, we will protect you”.
The problem is that that shoring up comes at the cost of enabling bad behaviour. Banking right now seems to run on the assumption that you’re allowed to erode the stability of the system for your personal gain, because governments world-wide will shore it up from the other side.
It’s important to remember that SVB lobbied hard to gain an exemption from banking stress test regulations. Their “inherently low risk” business clearly wasn’t, and they failed to defend against the inevitability that was the fed going up from the anomalously low rates of the 2010s.
What bad behaviour is being enabled here? The people who stand to gain from taking risks here (bank owners) have lost everything and are not being bailed out.
What is the bad behaviour of the depositors? Trusting that their deposits were safe in a bank? This isn’t bad behaviour, the government wants people to think that bank deposits are safe. Safety of bank deposits is really important to the economy.
> What is the bad behaviour of the depositors? Trusting that their deposits were safe in a bank? This isn’t bad behaviour, the government wants people to think that bank deposits are safe. Safety of bank deposits is really important to the economy.
Yes, it is exactly this bad behavior. The gov has only guaranteed safety up to $250k. Any entity exceeding this limit does so at their own risk. By depositing far above the insured limit, you are allowing that bank to transact with your money. The banks loans it out. So by definition those consumers thay ignored the limits incentivized the bad behavior.
Had this bank started losing customers because they faced insolvency risks, they may have changed their behavior. The market provides a feedback loop.
This policy could also encourage deposit flight at the slightest notion of risk - if everyone is made whole anyway the stability of a bank isn't any consideration for any of the depositors anymore. There is no game theory to moving deposits then.
That's what you are told. A bad bank went down due to risky investments and no hedging against obvious interest rate hikes. Yes, more will fail as a result and they should and the losses should not be socialized to the rest of us.
