moral hazards versus the little people

further reflection on the SVB saga

As you know, I dove head first into the banking upheaval day before yesterday in writing ‘protections again’. No author likes to admit she wasn’t clear but I wish I had used clearer language on two points in that piece. First, I referred to the banks’ capitalisation but I meant liquidity. My terminology was wrong but I did not catch it until rewinding it in my mind last night.

Additionally, I cited to the Federal Reserve and its role in interests rates, and its founding by Woodrow Wilson. That was correct but I should also have noted that the Federal Deposit Insurance Corporation (FDIC), which I also mentioned, began under the Franklin Roosevelt period when the Banking Act of 1933 established a regulatory mechanism to prevent the runs on banks that ignited the Great Depression of 1929. I was not clear on that. Nor did I note that the FDIC is a quasi-governmental organisation so the money to cover those insured accounts we discussed comes from the fees the Corporation assesses to the member banks. It’s not technically your and my pennies that provide the funding when a bank needs use the insurance to make the account whole: the member banks have paid a fee that becomes the insurance. Banks without FDIC guarantees are unprotected banks so these fees are important for credibility and protective reasons. I wasn’t clear on that. Apologies but I do get excited….

The Silicon Valley Bank (SVB) controversy also raises the perennial American angst