Tyler vs Matt on SVB Bailouts

Having nothing original to say about the topic du jour, I will highlight two different takes for your consideration.

Tyler in Can the SVB crisis be solved in the longer run?

An unwillingness to guarantee all the deposits would satisfy the desire to penalize businesses and banks for their mistakes, limit moral hazard, and limit the fiscal liabilities of the public sector. Those are common goals in these debates. Nonetheless unintended secondary consequences kick in, and the final results of that policy may not be as intended.

Once depositors are allowed to take losses, both individuals and institutions will adjust their deposit behavior, and they probably would do so relatively quickly. Smaller banks would receive many fewer deposits, and the giant “too big to fail” banks, such as JP Morgan, would receive many more deposits. Many people know that if depositors at an institution such as JP Morgan were allowed to take losses above 250k, the economy would come crashing down. The federal government would in some manner intervene – whether we like it or not – and depositors at the biggest banks would be protected.

In essence, we would end up centralizing much of our American and foreign capital in our “too big to fail” banks. That would make them all the more too big to fail. It also might boost financial sector concentration in undesirable ways.

To see the perversity of the actual result, we started off wanting to punish banks and depositors for their mistakes. We end up in a world where it is much harder to punish banks and depositors for their mistakes.

Matt Y in America needs more giant banks

The problem is, what happens if PNC fails? PNC is the sixth largest bank in the country with over $500 billion in assets. That makes it dramatically smaller than the Big Four banks that are informally labeled “too big to fail” and formally classified as Global Systemically Important Banks (GSIBs).

Tyler wants to see more banks, and not just “Too big to fail” banks. In as many industries as possible, we prefer less concentration. More competition tends to be good for customers and leads to more innovation. Tyler is more comfortable in the messiness that midsize banks cause, or at least he presents that as a necessary evil.

Matt is arguing against more banks, because Silicon Valley Bank wasn’t pre-designated as too big to fail, and yet we are in crisis mode now.

Matt might say that I’m mischaracterizing his argument. Specifically, Matt said that tiny banks are fine because they are small enough for a private company to buy in times to distress. Matt does not explicitly call for fewer banks. However, I think the demise of the mid-size bank would almost certainly result in fewer banks total.

To give a full picture of the arguments being made this week, here’s someone arguing against bailing out SVB.

And here is the EWED SVB material to date:

Jeremy: It’s Never Good News When Deposit Insurance is in the News

Mike: Estimating the effects of a slow news cycle

For real-time updates, follow Jeremy on Twitter:

4 thoughts on “Tyler vs Matt on SVB Bailouts

  1. Scott Buchanan March 19, 2023 / 7:58 pm

    Good points.
    As to small banks able to be purchased by say other banks, the big banks got really burned by this in 2008-2009. The govt asked big banks to take over failing operations like Countrywide, then the govt turned around and aggressively prosecuted those big banks for sins committed by the prior failed entities. So this time with the feds asked the big boys to take on Silicon Valley Bank (which would have been best outcome), they all declined.
    Point being it’s not so easy to get another bank to take over a failing one.


  2. StickerShockTrooper March 20, 2023 / 1:34 pm

    In a true free market competition, isn’t the failure of firms a feature, not a bug? We would need to accept that every decade, some % of banks, and their depositors, simply lose all their money.

    “In as many industries as possible, we prefer less concentration. More competition tends to be good for customers and leads to more innovation.” True in lots of things but false for products where we prioritize stability and reliability over innovation. Say, firefighting, water, power, etc. I think one can argue “keeping your life savings safe” is another one.


  3. Elon Musk March 20, 2023 / 1:56 pm

    If we were to envision a free (or relatively free) market solution why would an institution not unlike the FDIC emerge that demonstrates a superior ability to manage and mitigate the risk associated with bank failures? And in so doing be able to more efficiently underwrite the corresponding risk (with a clear profit motive to incentive such). Indeed, I can imagine an entire ecosystem of business models, including various entities and institutions that would trade such risk and thereby insure individual depositors; NOT at taxpayer risk but rather as underwritten by private investors.


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