Remember when banks were small?

 These were fully independent banks, not branches of bigger ones. You could walk in and see the bank president sitting at a big desk. Even major cities had neighborhood banks, serving the people who lived nearby. That’s just the way it was.

Large banks existed mainly in big skyscrapers downtown which most people had no reason to visit, serving big businesses while small banks served small businesses and the masses. If you needed a loan, you would put on your best clothes and go ask for one, often speaking to someone you knew from church and school functions.

 I followed one banker to four different banks over 15 years before he moved too far away. He knew my business as well as I did. But that was a long time ago in what seems a galaxy far, far away.

The system that replaced them is less personal but more efficient and convenient. My current “banker” whom I have never met has no authority to do anything but follow his models. 

Silicon Valley Bank: At the time it failed, some 96% of SVB’s deposits were in excess of the FDIC limit ($250,000 in most cases) and therefore uninsured. More accurately, they would have been uninsured except that the FDIC, in consultation with the Federal Reserve Board and Treasury Secretary Janet Yellen, invoked a “systemic risk” clause to extend unlimited coverage to all SVB deposits.

Those who received the benefit had been clearly warned not to expect any such thing, yet they got it anyway.  

SVB wasn’t systemic until it was.

Are the nominally “uninsured” bank deposits safe or not?

The key point is to avoid privatizing profits and socializing losses. 

If you want guarantees, someone (customers or banks) needs to pay for them. I see that hand: “John, won’t that mean customers change their banking habits?” (chuckling). Yes, that’s precisely the point. 

When large banks get implicit guarantees small banks don’t have, it changes the competitive balance. That MUST change.

The owners of about $10 trillion in uninsured bank deposits, now realizing it is at risk, are looking for new arrangements.

This comes as some of those depositors were beginning to notice they could get significantly higher yields in non-bank instruments like Treasury bills and money market funds.

 A handful of megabanks already hold most of the deposits and they are getting even more, at the expense of community and regional banks whom customers perceive (not wrongly) as less likely to be bailed out.

Longtime readers know I’ve been predicting a “Great Reset” in the 2030s that resolves our massive unpayable debts. I’ve also said things would get bumpy before we get there

John Mauldin 31 March 2023

https://www.mauldineconomics.com/frontlinethoughts/disturbing-thoughts