March 13, 2023

On the SVB Collapse

The Federal Reserve took control of Silicon Valley Bank (SVB) on Friday. Depositors were immediately reassured that insured deposits would be available on Monday morning, that is, today. Yesterday, however, the reassurances got substantially better: All deposits, even those beyond the nominal insurance maximum, will be made available. This, despite the FDIC’s explanation of insurance benefits:

The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

As it happens, SVB is a favorite bank of venture capitalists and startups, and, unlike many banks, most accounts were much larger than $250,000. We are being told that no taxpayer funds are being expended to make depositors whole; the required funds will come from the FDIC account, which is funded by levies on banks. What we are watching, officials emphasize, is not a bailout.

Silicon Valley Bank sign
Well, it certainly looks like a bailout. At the very least, we have created a moral hazard—why should large depositors worry about insurance limits if the government will protect them whatever their apparent exposure. The funds not covered by SVB assets that will pay back depositors will have come from banks that pay into the insurance fund. This makes FDIC insurance less able to pay actually insured losses in the future. The FDIC, if necessary, will charge banks more. This cost of business ultimately gets passed on to customers, i.e., taxpayers.

Ask yourself the question: if your own ordinary bank failed and you had more than $250,000 on deposit, do you really think you would get it all back? Or, if your house burned down and your insurance coverage was written for less than its current value, would you expect the insurance company to pay the full value of your loss? But since SVB held lots of corporate funds, the government felt it had to indemnify them. Once again, we find that big companies are “too big to fail,” and the corporate world doesn’t play by the same rules as the rest of us. Are you as tired of this as I am?

Senator Elizabeth Warren wrote about the SVB situation in The New York Times. She argued that (1) the managers of SVB were irresponsible, and (2) that irresponsibility was facilitated by the government’s having removed some of the safeguards of the Donn-Frank Act. That loosening of banking requirements resulted from—you guessed—heavy-duty corporate lobbying.

Welcome to the world of unconstrained capitalism.

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