Is the full protection of deposits the beginning of “moral hazard”?[Column]| coindesk JAPAN | Coindesk Japan

The events of the past few days will reignite heated debates about the American banking system that fueled Bitcoin’s growth after the 2008 global financial crisis. Depositors in two of the three banks were given near-bailouts after three banks closed due to a combination of mismanagement and a downturn in the market.

It’s not exactly a 2008-like bailout, as no tax dollars are used (at least not directly). The bank-funded Federal Deposit Insurance Corporation (FDIC) chose to classify Silicon Valley banks and signature banks as “systemic risk.”

This controversial classification brings to mind another key phrase often used in past crises. “Too big to fail.”

Classification as systemic risk led to full protection of deposits by the US Federal Reserve (Fed) and US Treasury, rather than limited protection of up to $250,000 per account by the FDIC. . Shareholders of the failing bank, on the other hand, see their shares worth nothing. The Treasury Department cites this as another reason why the measure does not qualify as a “bailout.”

Bitcoiner worries

The FDIC also announced that it would make this relief mechanism permanent with the creation of a new Bank Term Funding Program. The program provides loans against collateral, including government bonds.

This program is practical because the forced sale of government bonds with unrealized losses had a major impact not only on Silicon Valley Bank and Signature Bank, but also on the failure of Silvergate Bank, which specializes in crypto assets. seems reasonable. As many have already pointed out, aggressive interest rate hikes by the Fed have led to a decline in government bonds.

In the short term, all of these factors combine to provide a middle ground for the never-ending dilemmas of American banks. One of the dilemmas is not wanting the psychological and financial damage that would result from a huge loss of deposits. Second, supporting banks too aggressively gives them a perverse incentive to take big risks, creating serious long-term instability.

Taking a broader, longer-term view, recent events seem to confirm and reinforce Bitcoiner’s deepest anxieties. Anxiety is the concern that political influence determines whether or not you get support from the Fed, and that a more neutral monetary system is better for everyone in the long run. It’s an idea.

the United States government just implicitly agreed to backstop more than 17 trillion dollars I feel like I’m taking crazy pills here because there’s surprisingly little discussion of the implications of the Fed put pic.twitter.com/ujDphBN7Ki

— Matthew Graham (@mattysino) March 13, 2023

“Matthew Graham (CEO of crypto venture capital Sino Global Capital):
The US government tacitly agreed to protect more than $17 trillion in deposits. It’s like taking a crazy drug. There has been little discussion of the impact of a Fed put (the idea that the Fed will help if the market falls).”

Bypass rules for risk avoidance

The details of deposit protection at Silicon Valley banks and signature banks may be forgotten in the discussion of deposit risk going forward.

Most importantly, not only did Silicon Valley banks take excessive risks with their deposits, they also actively worked to circumvent rules that restricted such investments.

Specifically, Silicon Valley banks were overly exposed to interest rate risk. Silicon Valley Bank was betting that the Fed would not raise interest rates from their “almost zero” levels early in the coronavirus outbreak. Looking back, this was clearly a poor decision. Not only was the rate hike decisive in response to the inflation caused by the corona crisis, but the possibility of a rate hike was talked about for many years.

Experts believe there is considerable responsibility for these decisions and poor management choices. Investor Andy Kessler argued in The Wall Street Journal:

“The bear market began 14 months ago, in January 2022. Silicon Valley Bank management should not spend more than a year predicting that credit will shrink and the (IPO) market will dry up. I didn’t.”

The profit is mine, the risk is yours

In addition, Silicon Valley Bank has made aggressive moves to circumvent the rules it would have mandated to avoid risk.

As detailed by The New York Times, Silicon Valley Bank CEO Greg Becker supported the Trump administration’s policy of lowering certain stress tests and liquidity requirements for mid-sized banks like the bank. .

Rich and powerful people and organizations resist government regulations that prevent them from taking high risks for profit when the economy is good. And when things go wrong, they use their influence to absorb the damage on others. Such influence is often backed by assets amassed at high risk.

Was the deposit okay?

Another point likely to be forgotten in the discussion is that deposits at Silicon Valley and Signature banks would generally have been fine without the new deposit protections.

In normal bank failures, the FDIC oversees the sale of bank assets. In this case, depositors would accept losses and lose 10-15% of their deposits over the FDIC’s $250,000 guarantee.

On the morning of March 12, before the deposit protection was announced, a source told Bloomberg that between 30% and 50% of uninsured deposits at Silicon Valley banks would be available for withdrawal on March 13. , said that the rest could be withdrawn over time.

It’s possible that the FDIC didn’t find a buyer for Silicon Valley banks, or decided it didn’t seem likely to find a buyer for Signature banks. The Silicon Valley Bank auction was supposed to start on the night of the 11th and close on the 12th, but instead the deposit protection announcement was made.

If no one, at any price, wanted to buy Silicon Valley Bank, there might be more reason to worry over the next few weeks, but the poor management that made Silicon Valley Bank worthless as a company. There are far fewer reasons to justify policies to help.

caused panic

Finally, in order to make a moral judgment on the current situation, one must consider that some Silicon Valley moguls panicked and acted arguably maliciously.

As soon as Silicon Valley Bank closed on Monday, venture capital moguls began blatantly demanding that the government protect all deposits, even those in excess. He argued that if Silicon Valley Bank was not bailed out, bank runs would erupt nationwide, destroying midsize and regional banks across America.

Among them are prominent tech investors and co-hosts of the All In podcast, David Sacks and Jason Calacanis. Sachs’ tweets were so flippant that Twitter users asked for a fact-check.

Mr. Karakanis’ behavior was even more deranged. On Twitter, he posted an image of the movie Mad Max: Fury Road, urging his more than 690,000 followers to stockpile food and fuel. By Tuesday morning, Karakanis had deleted many of his tweets.

Internet never forgets pic.twitter.com/75zl6JDa7o

—Cas Piancey (@CasPiancey) March 13, 2023

“David Z. Morris: Looking back at my feed, I see a lot of lonely quote tweets.

Cas Piancey: The Internet never forgets.

Jason Karakanis: Anyone else shopping for guns, food and gas tomorrow? ”

Hail?

This theatrical fuss fueled the panic that Mr. Karkanis and Mr. Sachs had been warning about. Or deliberately incited panic. At worst, they were little more than terrorists, using huge platforms and the trust of an all-too-gullible public to incite fear. Their actions at least put pressure on the Fed to calm the fears they were warning and fueling at the same time.

And they got what they wanted! For them, it will be a long time. The principle that even if you deposit money in a bank with poor risk management, you can get your deposit back if you have a sufficient number of Twitter followers or have influence elsewhere, will be incorporated into American banking policy. rice field.

Can you say that it can’t lead to bad things?

This is very exciting! Unlimited FDIC insurance! So stop moving your money out of 0.5% banks and into 5% money market funds! Who’s with me?!?! pic.twitter.com/Xvy5QzTh3f

—Michael Green (@profplum99) March 12, 2023

“Michael Green, chief strategist at Simplify Asset Management, US investment firm:
This is exciting! Unlimited FDIC Insurance! Stop moving assets from 0.5% banks to 5% money market funds! Who would agree?!?!”

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: Below the Sky / Shutterstock.com
｜Original: Silicon Valley Bank and Signature Bank Reignite ‘Moral Hazard’ Dilemma Bitcoin Was Designed to End