From Breakingviews - Deposit insurance is addiction not medication
Though the FDIC has only promised to make SVB and Signature’s customers whole, the idea that it has set a template for the industry helped take the heat out of the crisis. The question is what happens next. At some point, the authorities will have to spell out their position. There are broadly three choices they could make.
One is to try and throw a bigger and more permanent protective net around savers. When the financial crisis struck in 2008, the FDIC heroically pledged to back all deposits in non-interest bearing accounts that weren’t already covered. It can’t do that this time. The Dodd-Frank Act of 2010 restricts the FDIC to offering unlimited guarantees to depositors of an individual bank, which must be in receivership.
The trouble is that deposit insurance is like Novocaine – the higher the dose, the more the patient becomes numb. SVB’s wealthy clients already turned a blind eye to the bank’s fickle funding and losses in its investment portfolio. If they knew their deposits were riskless, they would have been even more supine. Conversely, if SVB’s managers believed their patrons could flee, they might have been more careful about loading up on long-dated securities they couldn’t easily sell.
For that reason the best option is probably to do nothing – or better still, lower the deposit insurance limit. That might seem cruel. Deposit guarantees, with their aura of protecting the small saver, have a folksy appeal reinforced by the cinematic lesson in banking that is “It’s a Wonderful Life.” But most Americans have far less than $250,000 in their bank. At JPMorganFor tens of millions of customers, the $250,000 limit is a benefit they do not need, but still help fund.
With savers and investors jittery, regulators will need to tread carefully. It’s hard to get uninsured depositors to understand the dangers they face. If SVB’s venture capital and technology startup customers were oblivious to the risks, others are unlikely to be more vigilant. And if savers find themselves on the hook for small banks’ losses, funds will
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