Backstopping the banking system is necessary to save it, but irresponsible parties must pay a price.
Two American banks have failed—the Silicon Valley Bank (SVB) in California and Signature Bank in New York. The Federal Deposit Insurance Corporation (FDIC) has stepped in to take control and in the process has gone well beyond its regulatory remit. Under normal procedures, the FDIC would guarantee all deposits up to $250,000 and use the sale of the bank or pieces of it to bring larger depositors and creditors as close to whole as the asset sales allow. But in this case the FDIC has guaranteed all deposits regardless of size. Treasury Secretary Janet Yellen has indicated that Washington is likely to extend this protection to other banks too. The Federal Reserve (Fed) has established a special lending facility to ease strains further. A third bank, First Republic, looks shaky, and the biggest banks have stepped in to bolster it so that it does not join the list of failures.
Several commentators have criticized this special help, implying that it shows a favoritism toward the well-heeled and politically well connected, especially in Silicon Valley. There may be something to such criticisms, but such extraordinary actions by both the authorities and the financial community mostly reflect a desire to guard against a general banking panic. Bankers and regulators know that no bank, no matter how prudently managed or well capitalized, can withstand a run on its deposits. All depends on continued public confidence that deposits are safe. Without such confidence a general run could bring down the whole banking system and, as occurred in the financial crisis of 2008 and 2009, drive the economy into a deep recession.
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