But the ruling class - the "lords of capital" - are too moral for lectures, as deregulatory Trump policy made the failures easier. And whose moral hazard is it when such rhetoric (and game theory) applies differently for the poor. As Tom Nichols says, “it never seems to be the right time to talk about moral hazard, going all the way back to 2006”. “Another example of socialization of risks, privatization of rewards. Embarrassingly dysfunctional dynamic.” Darn “woke-bank” red herrings.
“More banks will likely fail despite the intervention, but we now have a clear roadmap for how the gov’t will manage them.”
(Reuters) - U.S. regulators may have stemmed a banking crisis by guaranteeing deposits of collapsed Silicon Valley Bank (SVB), but some experts warn that the move has encouraged bad investor behaviour.
Following a weekend of discussions over the future of SVB owner SVB Financial Group, banking regulators unveiled emergency funding plans for the bank.
[...]
Yet by guaranteeing that depositors would lose no money, authorities have again raised the question of moral hazard - removal of people's incentive to guard against financial risk.
"This is a bailout and a major change of the way in which the U.S. system was built and its incentives," said Nicolas Veron, senior fellow at the Peterson Institute for International Economics in Washington. "The cost will be passed on to everyone who uses banking services."
"If all bank deposits are now insured, why do you need banks?"
Separately, officials said depositors of New York's Signature Bank, which the New York state financial regulator closed on Sunday, would also be made whole at no loss to the taxpayer. Also, the Federal Reserve made it easier for banks to borrow from it in emergencies.
"... If the Fed is now backstopping anyone facing asset/rates pain, then they are de facto allowing a massive easing of financial conditions as well as soaring moral hazard," Rabobank bank strategists Michael Every and Ben Picton wrote in a note to clients.
DEPOSIT INSURANCE
Because only the first $250,000 of each deposit at a U.S. bank is insured by the Federal Deposit Insurance Corporation (FDIC), last week's collapse of SVB sparked concerns that its small-business clients would be unable to pay employees. Some 89% of around $200 billion in deposits held by SVB at the end of 2022 was uninsured, according to the FDIC.
Regulators have now removed that risk.
finance.yahoo.com/...
In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk knowing that its insurance will pay the associated costs. A moral hazard may occur where the actions of the risk-taking party change to the detriment of the cost-bearing party after a financial transaction has taken place.
Moral hazard can occur under a type of information asymmetry where the risk-taking party to a transaction knows more about its intentions than the party paying the consequences of the risk and has a tendency or incentive to take on too much risk from the perspective of the party with less information.
en.wikipedia.org/…
“I think part of what happened was that regulators wanted to send a very strong anti-crypto message,”
said Signature Bank board member and former congressman Barney Frank.
Then there’s the ‘neutrality’ of Swiss Banks
Testing Swiss Neutrality: The Alpine nation makes arms that Western allies want to send to Ukraine. Swiss law bans this, driving a national debate about whether its concept of neutrality should change.
The war is testing Swiss tolerance for standing on the sidelines and serving the world’s elite on equal terms, putting the country in a bind of competing interests.
Its arms makers say their inability to export now could make it impossible to maintain critical Western customers. European neighbors are pulling the Swiss in one direction, while a tradition of neutrality pulls in another.
“Being a neutral state that exports weapons is what got Switzerland into this situation,” said Oliver Diggelmann, an international law professor at the University of Zurich. “It wants to export weapons to do business. It wants to assert control over those weapons. And it also wants to be the good guy. This is where our country is stumbling now.”
www.nytimes.com/...
No, it’s not “wokeism”.
Over the weekend, state regulators shut down Signature Bank in New York—no word yet on if that will turn out to also have been a “woke bank” or if it won’t get enough attention for Republicans to bother. Depositors at both banks will get their money, even those whose deposits were not insured by the Federal Deposit Insurance Corporation. In a joint statement, Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell, and FDIC Chair Martin Gruenberg announced that decision, describing “decisive actions to protect the U.S. economy by strengthening public confidence in our banking system.”
While depositors will get their money, the bank shareholders and executives are not being bailed out and taxpayers will not be on the hook. “Shareholders and certain unsecured debtholders will not be protected,” Yellen, Powell, and Gruenberg said. “Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.”
www.dailykos.com/...
Listen to Liz.
Had Congress and the Federal Reserve not rolled back the stricter oversight, S.V.B. and Signature would have been subject to stronger liquidity and capital requirements to withstand financial shocks. They would have been required to conduct regular stress tests to expose their vulnerabilities and shore up their businesses. But because those requirements were repealed, when an old-fashioned bank run hit S.V.B., the bank couldn’t withstand the pressure — and Signature’s collapse was close behind.
On Sunday night, regulators announced they would ensure that all deposits at S.V.B. and Signature would be repaid 100 cents on the dollar. Not just small businesses and nonprofits, but also billion-dollar companies, crypto investors and the very venture capital firms that triggered the bank run on S.V.B. in the first place — all in the name of preventing further contagion.
Regulators have said that banks, rather than taxpayers, will bear the cost of the federal backstop required to protect deposits. We’ll see if that’s true. But it’s no wonder the American people are skeptical of a system that holds millions of struggling student loan borrowers in limbo but steps in overnight to ensure that billion-dollar crypto firms won’t lose a dime in deposits.
These threats never should have been allowed to materialize. We must act to prevent them from occurring again.
www.nytimes.com/...