> it has created a huge moral hazard by signaling that the $250,000 FDIC limit on deposit insurance does not exist in practice. The clear signal it sends is that when financial institutions make poor decisions, the government will swoop in to clean up the mess.
It sounds like they have swooped in to protect customers and give owners/shareholders the boot. Isn't this a sign that future banks can't be reckless without consequence?
Of course it does - you just put your money with whatever fraudster offers the highest interest, when the gravy train eventually stops, well its no loss to you. See also: Icesave.
I mean, did svb offer higher rates/lower costs than average banks? If yes, depositors of more than 250k have to take a haircut, proportional at what was left in the bank (and honestly it seems like all deposit were backed, so even if founds aren't available now, there will be no losses)
Ideally the idea of an FDIC limit is just removed and banks are just further regulated to ensure that risk is kept at acceptable levels such that FDIC insurance fund is always capable of absorbing any failures in full.
Im not sure thats possible. Like all regulation, it’s impossible for the regulator to truly know the full situation. It would take a massive army of regulators to go through the financials of thousands of banks in the US. Plus the banks can lie, put things in their best light, or structure transactions to make it look like a lower level of risk than there really is.
And of course, by the time the regulator finds out, the damage is done.
I think its far better to cap the risk protection. That way you have customers doing their own risk management as well - avoiding what they perceive to be risky banks, diversifying deposits across banks, choosing alternative assets to store wealth, etc.
It sounds like they have swooped in to protect customers and give owners/shareholders the boot. Isn't this a sign that future banks can't be reckless without consequence?