Will a universal uninsured deposit guarantee be next?

Wall Street and Silicon Valley were in full panic over the weekend demanding that the Treasury and Fed intervene to save the day. 

he biggest banks are now the safest, and deposits are flooding into them. J.P. Morgan can park that money at the Federal Reserve and earn interest on its reserves. 

Will a universal uninsured deposit guarantee be next? This would be a monumental policy surrender, essentially admitting that the regulatory machinery established in 2010 by Dodd-Frank failed. We may be the only people in the world who still worry about “moral hazard.” But a nationwide guarantee for uninsured deposits, even for a limited time, means this will become the default policy any time there is a financial panic.

The Fed is acting as it should as a provider of liquidity to all comers. But it’s going further and offering one-year loans to banks against collateral of Treasurys and other fixed-income assets. The Fed will value these assets at par, which means banks don’t have to sell their assets at a loss. The Fed is essentially guaranteeing bank assets that are taking losses because banks took duration risk that Fed policies encouraged. 

This too is a bailout.

WSJ Editorial 12 March 2023 


In January 2020, SVB had $55 billion in customer deposits on its balance sheet. By the end of 2022, that number exploded to $186 billion. 

The bank put some of this new capital into higher-yielding long-term government bonds and $80 billion into 10-year mortgage-backed securities paying 1.5% instead of short-term Treasurys paying 0.25%.

SVB reached for yield, just as Bear Stearns and Lehman Brothers did in the 2000s. With few loans, these investments were the bank’s profit center. 

SVB got caught with its pants down as interest rates went up.

Andy Kessler WSJ 12 March 2023


The alchemy is “the belief that money kept in banks can be taken out whenever depositors ask for it”, Wolf

Lord Mervyn King, former governor of the Bank of England.  His book is called The End of Alchemy.


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