This Event has Passed
The recent run on the Silicon Valley Bank (SVB) re-introduced an enduring reality. The robust faith that people have in bank money can rarely but quickly flip to distrust. The episode also reminded us that deposit insurance can prevent people from flipping out by assuring them that a bank’s problems are the insurer’s problems. As a result, government regulators navigate a tension. The more people trust guarantees that accounts will work smoothly regardless of what a bank does, the less depositors will monitor or discipline their banks.
When the SVB run threatened to spread to other banks, the FDIC again faced this dilemma: (1) let some depositors suffer and likely see distrust spread or (2) expand the blanket of coverage and so take on even more responsibility for the soundness of banks. In the past, each path has led to unpleasant unintended consequences, so the dilemma likely will endure as the consequences of the recent episode unfold.
Dr. Stephen Quinn is a Professor of Economics at Texas Christian University where he teaches Economics of Financial Markets, Financial History, and Law and Economics. He received his PhD in Economics at the University of Illinois at Urbana-Champaign. His research focuses on monetary and financial development of early modern Europe.
