NEW YORK, March 16 (Reuters Breakingviews) - Deposit insurance is as American as apple pie, and twice as unhealthy. After Silicon Valley Bank and Sign

Deposit insurance is addiction not medication

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2023-03-19 20:00:07

NEW YORK, March 16 (Reuters Breakingviews) - Deposit insurance is as American as apple pie, and twice as unhealthy. After Silicon Valley Bank and Signature Bank (SBNY.O) failed over the weekend, Uncle Sam swept in, promising to pay back all of their customers. That move may have prevented a wave of copycat bank runs. But the idea of bailing out savers without limit is both unworkable and unhelpful.

Risk-free banking for most households is the norm almost everywhere, but it’s a recent invention. Save for the United States, which kicked off the trend in 1933, most countries only launched formal deposit guarantees within the last 50 years. Britain joined the club in 1979, and Europe mandated coverage for member states’ banks in 1994. China was a latecomer in 2015. New Zealand is one of the few holdouts, though a scheme is working its way through parliament.

The main charm of deposit guarantees is that they reduce the risk of bank runs. The failure of SVB Financial (SIVB.O) highlighted the weakness in that thinking. Bank deposits in the United States are guaranteed up to $250,000, and over 90% of SVB’s accounts held more than that sum. It’s a widely shared vulnerability. Around $7 trillion of all U.S. deposits are uninsured, 40% of the total. Thirty years ago it was less than 20%.