Sunday, as I was preparing to write about the Silicon Valley Bank situation, I sent an email to Professor Lawrence H. White of George Mason University, who really knows this stuff. I invited him to respond to some of the points made by Bill Ackman, who was arguing for a government rescue of depositors.
White very generously sent along some slides he uses in his undergraduate course on money and banking; they are embedded below. White also responded to Ackman's argument that understanding a bank's riskiness or safety was too much to ask of depositors. "Nobody is asking households with insured deposits to shop around for a safe bank," White wrote. "With deposits insured up to $250,000, the current system is only asking people with uninsured deposits, like corporations with payrolls to meet, to hire a professional money manager who can evaluate the safety of banks versus other places to park large sums of cash. That doesn't seem unrealistic."
Write went on: "Silicon Valley Bank took excessive risk by carrying a huge duration gap, and didn't hedge that risk, leading to its insolvency when interest rates rose. The current system relies on uninsured depositors shopping around for a safe bank to incentivize bank prudence (regulators being often unaware of how close a bank is to insolvency were assets marked to market) by making risky banks pay a premium for uninsured deposits. If the government lets uninsured depositors off the hook this time, moral hazard intensifies yet again. Not closing insolvent banks promptly is what made it so costly to eventually resolve the S&L crisis in the 1980s."