That would have prevented these runs, which counterintuitively means fewer FDIC payouts, not more. Then couple that with stricter rules to prevent risky gambles funded by deposits.
We don't: The average person does not have $250k sitting in a checking or savings account at a single bank.
SVB collapsed because they have highly correlated (due to being startups under effective, if not actual, corporate control of a few VCs), jumpy depositors. This is something regulatory rules have not incorporated into their risk frameworks (at least not sufficiently to allow for a margin of safety in times of raising interest rates).
No one should wake up one day and find out most of their life savings or inheritance is gone because of banking shenanigans. This is not like a hurricane or catastrophic expensive surgery. This is entirely preventable and fixable by the government.
Gov’t sells low yield bonds to banks during pandemic => gov’t jacks up interest rates to fight inflation => value of bonds previously sold to banks plummet => bank marks bond values to market and is now technically insolvent causing a bank run => grandma loses majority of her life savings => government refuses to reimburse depositors above FDIC limit even though it created the problem to begin with.
That is not a chain of events I am ok with. Bank management and equity holders should get wiped out but not depositors.
I'm not sure we can even get a vote on the floor that would have detrimental effects on the former class. The legislation is preordained.
You are proposing that bank management and equity holders get wiped out, not the general public checking account-holder; how would that even be possible, since they write the rules, pull the strings, lobby, etc. magnitudes more than you? They are the rulebook. They do so to such an extent that the entire system is predicated on everybody agreeing to do the same thing lest the system collapse.
Thus far, only bank investors have been impacted, and that seems likely to continue.
Nationalize it. We've already established that the shareholders are getting zilch, so there's no argument where we're "destroying value."
From a consumer/operations level, pulling the bank under the state umbrella instantly dissipates any need for a run. They're backed by the full financial might of the government, so you don't have to worry that the ATM will be taped over and you can't get your $35.19 out of the account.
From a contagion perspective, the state backstop and elimination of investor-centric motivations allows for stabilization and avoids fire sales. If the institution was asset-sound but not liquid, as people claimed for SVB, the state could afford to cut margins and pull funds from other sources while they waited for the maturity-mismatch problems to unwind as they mature.
From a social perspective, suddenly you have a new toy in your box of social engineering tricks. The branches that used to cater to crypto-bros can reopen offering basic checking for the unbanked, small-business loans, and mortgages in historically red-lined areas.
A conceptual equivalent might be the story of Conrail: in 1976, the Federal government took over a handful of basket-case Northeastern railroads; without investor meddling, they were able to take the long game-- rehabilitate and rationalize the system, eventually re-privatizing it in 1987. I'd argue banks are less difficult than railroads in that regard-- you're not as tied to physical place and literally rusting assets.
If you told the banks that you will protect their business regardless of what corrupt, stupid or greedy behavior's they practice... what do you think they'll do?
this is so very screwed up.
That's not what the FED is doing though. They are protecting the depositors not the business. The equity holders are getting completely wiped out and most of the employees at First Republic Bank are probably going to lose their jobs so the business is definitely getting screwed.
I agree that in both of the above cases, First Republic shareholders and staffing suffer. But the latter introduces the conspiratorial angle and the unjust-ness.
> The banks and their stock is free to go to zero,
Sure, but what about the dividends and bonuses already paid out from the times it worked out in the risky banks' favor? You're suggesting a government/central bank subsidized casino.
Absolutely. I just can't think of a good mechanism to implement it in the current framework. Maybe bonus payouts should be held in escrow/be otherwise claw-back-able for some time?
The only instance of clawing back dividends that I'm aware of is, ironically, Wirecard – I believe there is an ongoing lawsuit to claw back dividend payments from investors. (The irony is that the German government/regulator were actively prosecuting journalists and short sellers back when the line was trending up, yet now German courts are effectively holding long investors liable for Wirecard's fraud.)