No. of Recommendations: 10
Hi RW, sorry Goofy's nasty reply got to you, and perhaps you won't respond to this but just in case -
You make a good point that these VC startups are not like ordinary bank depositors, and maybe should have assumed a bit more responsibility for verifying the solidity of their banking arrangements, and perhaps no bailout was necessary, given that the losses for clients would have been small and their VC backers could have probably made up for any shortfall with minor additional financing. But whether that is the case or not, there is also another problem that I believe the government was trying to address with its guarantee of deposits, and that is the effect that loss of deposits would have on clients at other, non- systemically important banks (non-SIBs).
If you are a depositor at First Republic, for instance, and its shares are down, and it is looking for capital infusions, and if you know that SVB depositors got bailed out, maybe you sit tight. But if the SVB depositors took a haircut on their deposits, even if it is just 3%, why not just transfer funds to a bank trhat you are fairly certain will not be allowed to fail, like Wells Fargo or JP Morgan?
The possibility of contagion, with other banks failing because depositors don't want to take any chances, would become much more real. And even if no other regional bank actually fails, you still don't want a massive centralization to the bigger banks.
As long as banks are not insolvent, guaranteeing deposits should have no cost to the government. And if banks are not solvent, they should be shut down by the government. It's hard for me to see how this rescue is not in the interests of everyone.
dtb
