Bank runs are as old as the hills, but since 1933, federal deposit insurance has made them rare, according to commentary from the Washington Examiner. Suddenly, bank runs are back with the run on and failure of Silicon Valley Bank in March. Why did SVB make such poor asset investments? First, the simplest explanation is that the portfolio managers were inexperienced or simply stupid. Second, and perhaps more likely, to attract and keep multimillion-dollar cash depositors, the bank had to pay an attractive interest rate. Third, the banks’ risk managers may have foolishly believed the Fed’s guidance that it could hold inflation to an average rate of 2%. Fourth, the Fed’s quantitative easing kept long-term interest rates artificially low. Fifth, the Treasury’s budget deficits and the Fed’s massive purchases of assets produced a historic increase in the amount of money that flowed into the banking system. Sixth, SVB was jointly regulated by the Federal Reserve Bank of San Francisco and the state of California. Reports indicate that while regulators had identified liquidity problems at SVB, they did not push SVB hard enough to correct this deficiency. The regulators were unprepared for the speed and magnitude at which a bank run could occur with modern technology. The government’s decision to cover all deposits in the failed banks may stabilize the banking system in the short run, but it harbors the prospect of “moral hazard.” Are all deposits de facto insured? If deposits in excess of the insurance maximum migrate to the largest banks, the too-big-to-fail problem is exacerbated.
