Silicon Valley Bank and Signature Bank faced runs on their deposits early in the month. Due to a mismatch between liabilities and assets, a liquidity crisis formed. And this crisis led both banks to bankruptcy. The authorities were forced to intervene to protect depositors. It seems that the crisis has been contained. Everything seems to be under control.
The same old story: Poor risk management by bankers. Inadequate oversight by regulators. Individual cases or a systemic crisis? Of course the markets care. What will be the next bank to fail?
First Republic Bank shares plunged precipitously thanks to a crisis of confidence. His clients began to flee, fearing a Silicon Valley Bank-style bust. Similar cases. Liquidity problems due to placing the money in illiquid assets. Basically, more risks were taken than necessary. Mistakes were made. And they were very reckless. In other words, the perfect recipe for disaster.
Why didn’t they insure all the deposits? Why did they lend more money than they had on deposit? Why did your top executives sell their shares? However, the banking business is a trusted business. And, after the collapse of Silicon Valley Bank and Signature Bank, all eyes turned to the First Republic because of so many red flags.
The big question: Why not let a failed bank die? Many ask that question. Is it unfair? Why not let the free market work its magic? Why is the intervention necessary? On March 19, 11 US banks deposited $30 billion with First Republic. Apparently, it was not enough. The share price continues to wobble in step with what Treasury Secretary Janet Yellen says or doesn’t say. Following the collapse of Silicon Valley Bank and Signature Bank, Yellen told the Senate that she is not considering any plans to guarantee all bank deposits without congressional approval. Naturally, such a comment caused a fall in the stock market and a fall in the shares of regional banks.
If the final decision falls into the hands of politicians, this can be ant color. Because surely we would return to the old debates about the moral hazard involved in rescuing a failed bank. Classical liberalism, the benefits of the invisible hand, the free market and everything in between. Politicians, as in 2008, could use this crisis to continue (as usual) demonizing bankers. Act followed. Time is wasted in sterile fights. The crisis deepens due to the late response. AND, finally, there will be no choice but to do what is necessary to avoid a major crisis. Politicians must eat their words. But resentment is already sown in the public.
There we have the school of 2008. How much time was lost in Congress? Politicians defending dogmas in the middle of a house on tires. ANDa, with the noose around his neck, what should have been done from the beginning was done. What does the public remember? The public remembers the dogmatic debate. Remember the speeches about the “unfairness of bailouts.” But it does not recognize the effectiveness and benefit of the measures taken. The crisis was overcome by doing what had to be done.
Now the pragmatism. Let’s put ourselves in the shoes of a First Republic Bank customer. Suppose he has all of his savings in there, and suddenly he turns on the television to listen to the debate on the banking crisis in Congress. “I am very concerned,” says Maine Republican Sen. Susan Collins. “It seems to me that, by guaranteeing all the deposits [en SVB], a situation is created where they are immune to loss…in a way that puts a well-managed bank at a competitive disadvantage. So I guess my question to you is, how is this fair?
Is that fair? The key concept in this case is not justice. Actually, it is trust. This hypothetical customer isn’t thinking about the fairness of all this stuff. His concern is one: Is my money safe? The answer to this question can make the difference between a banking crisis and a banking system out of the woods. Do Senator Collins’ comments inspire confidence?
In a bank run, they pay just for sinners. The mistakes of a few are paid by the whole society. In other words, we are not talking about a store or a restaurant. In that case, classical liberalism applies, because bailing out a bad deal hurts the overall efficiency of the entire market. But leaving a troubled bank to good God is an entirely different animal. The rotten apple affects the entire basket. And you have to intervene to protect the entire basket. Doing nothing is unfair, because it puts the whole system at risk. Here it is not a very good idea to get too dogmatic. Classical liberalism is not a panacea.
In the first instance, the ideal would be to keep this in the private sector. That is, the takeover of the bank by its rivals. However, not every bank is willing to jump on that boat. Because, during a liquidity crisis, nobody wants to run out of liquidity. 11 banks, in a coordinated effort, assumed that responsibility. But, without the support of the authorities, that first injection of liquidity can turn into salt and water.
Will those billions obtained thanks to private banking be enough? Is not sufficient. What the public needs to know is that the cavalry is ready to respond if necessary. That gives the confidence required to avoid a bigger problem. Is my money safe? Yes. Well then, no need to panic. No need to take my money out of the bank. Because Papa State will intervene if necessary. It is not a good idea to burn down the Church to solve the rat problem in the name of justice. Pragmatism. The lesser of evils is chosen to avoid catastrophe. Suddenly, it’s not fair. It is what is necessary.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
It may interest you:
Investments in crypto assets are not regulated. They may not be suitable for retail investors and the entire amount invested may be lost. The services or products offered are not directed or accessible to investors in Spain.