the message to depositors everywhere, of every size, is "don't worry about your bank's solvency, we'll protect you".
So market scrutiny is removed as a discipline on bank asset strategy.
Uhh.. isn’t that FDIC’s raison d’tere? (Aside from the ‘every size’ part)
Bank runs are caused by low confidence. FDIC makes depositors confident.
It’s also interesting that failure is socialized among banks- who are equipped to judge the risk their peers are taking.
Actually no. The FDIC was created to protect small depositors without the knowledge to protect themselves against bank failure. Larger depositors were expected to assess their banks or find ways of safeguarding themselves.
One argument against deposit insurance was that it would lead to complacency and businesses offloading their responsibility to the government. And, here we are.
100% deposit insurance sounds great until you realize it leads to government regulation of 100% of the lending. TANSTAAFL. That is a very very bad outcome, there's very little room in it for a model like the Silicon Valley Bank, but that's where we are headed.
Uhh.. isn’t that FDIC’s raison d’tere? (Aside from the ‘every size’ part)
Bank runs are caused by low confidence. FDIC makes depositors confident.
It’s also interesting that failure is socialized among banks- who are equipped to judge the risk their peers are taking.