The Sunday policy actions by the Treasury, Fed, and FDIC are among the most unwise and unprincipled actions of bank regulators in U.S. history. And they don’t address the urgent need for additional action to prevent further banking troubles.
The first policy was the FDIC’s decision to fully insure all the uninsured deposits at two failed banks. The rescue of uninsured depositors cannot be justified economically. Neither of the failed banks was systemically important; it is not possible to argue that uninsured depositor losses in these institutions would have any significant consequences elsewhere in the financial system. The authorities missed a great opportunity to reinforce market discipline by allowing at least some losses on the uninsured deposits at two banks that clearly are not systemically important. The bailout of these banks’ uninsured deposits seems best understood as a political choice to prevent politically influential Silicon Valley firms from having to suffer delayed access to their funds or any risk of loss.
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