opinion | Why are banks failing 15 years after 2008?

Banking theory holds that large depositors have the financial sophistication and incentive to ensure the banks where they store their money are safe. Keeping deposits above a certain threshold uninsured is therefore intended to be a form of market discipline, complementing oversight by state and federal regulators. But that was never a realistic expectation for most depositors, who have other things on their minds. And because large depositors know they are protected when push comes to shove, they have no incentive to turn to safer banks.

This is hardly a new problem. In 1991, Jerome Powell, now Chairman of the Federal Reserve, was a senior Treasury Department official assigned to deal with the collapse of the Bank of New England Corp. to deal with Speech 2013: “We concluded that either the FDIC would protect all of the bank’s depositors, regardless of deposit insurance limits, or there would likely be a run on all money-centre banks the next morning — the first such run since 1933. We chose the first option, without objection.”

Under the Federal Deposit Insurance Corporation Improvement Act of 1991, the FDIC is required to resolve bank failures in a manner that causes the least cost to the deposit insurance fund, even if it means wiping out uninsured depositors. But in practice, uninsured depositors are almost never wiped out because the FDIC arranges for a stronger bank to take over the failed bank and absorb all of their deposits. The Dodd-Frank Act of 2010 made an explicit exception to the least-cost test for cases of “systemic risk” – that is, when compliance with the least-cost test would have “serious adverse effects on economic conditions or financial stability”. . That’s the exception the government made for Silicon Valley Bank and Signature Bank.

When market discipline works in theory but not in practice, an alternative is to bow to reality and explicitly insure all bank deposits. It would certainly reduce the number of panics like the one that killed Silicon Valley Bank and Signature Bank without giving the banks carte blanche for irresponsible behavior. One person who prefers this solution is Robert Hockett, a professor at Cornell Law School who has written two pieces about the idea for Forbes recently. FDIC premiums are higher for riskier banks, which makes sense. Given that the FDIC is already accounting for risk, Hockett told me the $250,000 limit is “redundant, like the human coccyx.”

Insuring all bank deposits would make banks look more like public utilities, Petrou told me. She said she would prefer to rely more on market discipline than originally intended. But this ship may have already sailed.

Outlook: Thomas Simons and Aneta Markowska

“It’s hard to say that the labor market is cracking as the workforce rises by 311,000, but it seems like we are at least at the ‘beginning of the beginning’ of the labor market slowdown process,” Thomas Simons, A money market economist at investment bank Jefferies and Aneta Markowska, chief economist at Jefferies, wrote Friday after the Bureau of Labor Statistics reported employers added 311,000 jobs in February. On pay, they wrote: “Although the path for wage growth will be uneven, today’s data suggests further moderation will occur in the coming months.”