Just there is Gresham’s law, (Bad money drives out good money.)
There is, what we might call “Bob’s Law” (Sometimes bad banks drive out good banks.)
As such, even anti-regulation person such as myself agree that if a banks are to have a “level playing field” then certain regulations are necessary. ( Bank = any institution that has access to secondary banking markets, certain facilities from the Fed, FDIC etc.)
EX:
In 2020 the Fed reduced reserve requirements, which recently was 10%, to ZERO (yes you read that right) The big banks keep about 2% in reserve.
Silicon Valley Bank (SVB) charge high-risk borrowers the “going rate” plus 2%. Right now the market standard is approx 3%. Many years ago the market standard was 3.5% 3.5%. Putting in some kind of minimum might be reasonable.
50% of SVBs assets were in government bonds but
– Nearly all of them were recently issued long term bonds, and
– SVB had zero insurance (swaps) on those bonds
– Jay Powell announced 12 consecutive times that rates will go up (meaning people should dump their long term bonds) and SVB did nothing. They bet the house on a Fed pivot Presumably regulations could be enacted to prevent any of those practices
There has been a lot of discussion about SVBs gov’t bonds, but the fact is SVB had a whopping 35% of its assets in illiquid commercial loans to high-risk tech start-ups. Presumably a regulation could be enacted to prevent that too.
I don’t think any banks want to emulate SVB, the fed is bailing out the depositors, not the banks owners and executives. There is no moral hazard here.
It is true that backstopping SVB does not present an additional “moral hazard.”
That said, providing FCIC insurance, providing the FED facilities such as the emergency loan window, free interest on overnight deposits etc…(thing 1)
encourages banks to take riskier behavior, (thing 2)
Because thing 1 causes thing 2
the same gov’t and quasi-governmental agencies encouraging that encourage additional risk-taking above and beyond what the free market would do on its own,
It makes sense that they take steps to ensure the risks are not excessive and
a level playing field (such as a mandatory 10% reserve.) is required, so that risky behavior by one bank does not give it “to much of” an advantage over others.
Old-school conservative, free market banking should not be squeezed out of existence because of government actions like overnight rates, FDIC insurance etc.
So you don’t think the wizards of finance at these large corporations should be checking these banks out, and avoiding institutions with red flags like this one had?
It’s one thing to protect people like me, a guy with barely a high school education from this kind of stuff, but why should we be protecting major corporations who should know better?
Go listen to Sean Hannity’s interview with Kevin O’leary (Shark Tank angel investor, and big business guy himself). He admitted he knew SVB was run by morons, and still did business there. Why should he be protected?
Depends if you only want the biggest four or five banks left standing. If they had not backstopped those depositors everyone would have moved to the SIB’s (systemically important banks) and that would pretty much be the end of regional and local banks.
That’s why they did it, a bank run was underway that would have toppled many more regional banks.
To be a bank means to be a participant in the Fed/FDIC system.
Participating in the Fed/FDIC system means even without special programs or legislation, a partial backstop (FDIC insurance, access to Fed facitilities etc.) is provided.
The Fed/FDIC do not “wish” to provide such backstopping to banks that take crazy risks, and “wish” that solid banks compete on a level playing field with risk-taking banks.
Thus the Fed/FDIC already have extensive regulatory authority over how much risk banks can take.
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Point being
It is not crazy for “the wizards of finance at these large corporations” to assume that their deposits were safe. It was wrong, but not crazy.
Even without additional legislation the Fed/FDIC already have sufficient authority, and could have made those deposits safe. They failed to exercise the powers they already have. They do not need an expansion of power. They need to get off their rose-colored asses and use the authority they already have.
– Example: In Mar 2020 the Fed reduced reserved requirements from 10% to 0%. FDIC maintained its 2% reserve requirement. A big part of this crisis would have been averted if the Fed had maintained its old requirement.
No sorry, ten percent reserves wouldn’t have saved them either. At that point everyone wanted their money out of the bank, that could only be met with 100% reserve.
What did not happen: 100% of all businesses and 100% of all wealthy persons are withdrawing 100% of their accounts.
What has happened: Banks with teensy weensy reserves publicly shrieked that their teensy weensy reserves might not be sufficient and that triggered a bank run of about $600b which because reserves are so teensy weensy, actually threatens a domino effect.
Silicon Valley Bank Collapse Suggests 0% Reserve Requirement Won’t Halt Bank Runs
In May 2002, the reserve requirement was 10%, according to Economic Policy Review. . . .
In November 2022, the Fed reiterated its reserve requirements were still 0% with a twist. That is when the Fed noted “technical details related to reserve requirements for depository institutions” would go into effect in January 2023.
Banks have exceeded that reserve requirement. For example, at the end of December,
Bank of America had 2% of its $1.93 trillion in deposits in cash;
JP Morgan held 2% of its $2.3 trillion in deposits in cash and
Silicon Valley Bank had 5% of its $175 billion in deposits in cash.
Presumably regulations could be enacted to prevent any of those practices 
