If we learned anything from the 2008 financial crisis it’s that bailing out banks is a bad idea. Consumers and depositors are the ones that needed the help. When governments give money to banks directly to stop them from failing they pad their own pockets with rich bonuses, do not continue to lend money to consumers and businesses that need it to keep the economy running, but most importantly It enforces Moral Hazard. Moral Hazard is the notion that if banks rewarded through bailouts and not punished for their mistakes, they will continue to make the same risky behaviors in the future.
If we learn anything from the 2023 banking collapses of Silicon Valley Bank and Signature Bank it should be that bank deposit insurance for consumers and small businesses needs needs to be reformed, right now.
It’s clear that regular consumers and small businesses didn’t do anything wrong in dealing with a federally regulated and monitored bank like SVB or Signature. In the United States deposits are guaranteed by the federal government up to USD $250,000, in Canada it’s USD $75,000 and in the United Kingdom it’s USD $100,000.
If a bank goes down in any of these Western countries for to any reason it’s clear that the government is going to step in and help and as noted they’re not likely to help the banks any more but they are likely to help the depositors.
A “run on the bank” is caused by panic panicky depositors withdrawing withdrawing all of their money in a short period of time. A run is much less likely to occur if depositors feel that the federal government will ensure their deposits and their non risky investments like guaranteed investment certificates are guaranteed.
In Silicon Valley Bank’s case case the US Federal government stepped in on a Sunday and deposits were available to everyone on Monday. That type of quick intervention stops a run. So why is deposit insurance so limited?
To be “middle income” in the United Kingdom is to make about £50,000 a year, in Canada it’s about $75,000 Canadian Dollars and in the United States middle income is about $70,000. With those types of incomes deposits from prudent citizens far exceed the deposit insurance caps and as a result average citizens often are at great risk when a bank collapses.
If we want to stop runs on the bank from occurring in the future it makes sense to have depositors feel safe regardless of their bank’s misdeeds and mistakes. If the government is going to step in and backstop depositors in virtually all circumstances anyway, governments should just increase deposit insurance to some modernly reasonable level like $2.5Million, today. That would stop consumers from withdrawing their money when they hear rumors of problems at the bank and and that will stop many future runs, saving both citizens and the economy undo stress and distraction.
In SVB’s case, the large depositors were startup companies with hundreds of millions of dollars on deposit, so increasing depost insurance to a few million dollars would not stop the bank from collapsing but it would stop consumers and small businesses from panicing making the problem so much worse