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Too big to fail is in the process of being extended to a whole new set of banks

 This time a popular view is that bank depositors, even big sophisticated businesses with large uninsured deposits at risk, can’t be expected to police how their banks behave.

The view is both right and horribly wrong. 

The deposit backstop could in theory be a one-off, but it is hard to see how the government can avoid using it again next time a midsize bank wobbles (and many are losing deposits fast amid the current uncertainty). 

Too big to fail is in the process of being extended to a whole new set of banks. 

Shareholders chose to sell rather than push for action (the stock lost two-thirds of its value last year as a result).

“Maybe the Fed’s low-for-long promise was the problem—not only did the SVB CFO believe it but the Fed’s stress test designers believed it too,” said Prof. Douglas Diamond, of the University of Chicago’s Booth School of Business, who won the Nobel Memorial Prize in Economic Sciences last year for his work on bank runs. “Supervisors didn’t do their job here.”

In the short term, none of these things should repeat.  But in the long run, we can expect complacency to take hold again because it always does.

There are only two ways around it, neither realistic. First, let the occasional non-systemic bank—like SVB—go to the wall, uninsured depositors lose out, management departs in ignominy and shareholders lose everything. Do this every few years and the lessons will stick. 

The second choice is to remake the financial system to eliminate the risk of bank runs. Checking accounts would be held with “narrow banks” that look very like a government money-market fund, holding nothing riskier than short-term T-bills and making their money from transaction fees, not borrowing short and lending long. 

James Mackintosh WSJ 16 March 2023 


The Volcker rule – that deposit-taking banks would not be able to engage in proprietary trading, or to own hedge funds or private equity firms – is the first time any government has proposed a sensible structural remedy for the problems created by bailing out banks in 2008.

John Gapper FT January 27 2010



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