For the Diamond-Dybvig model and Policymakers
This post is welcome as it shows that we should worry about the policy responses to the SVB failure. There is an additional reason to worry that Russell has not mentioned: the different positions taken by the various top policymakers which can be seen as opposite and thus raise the issue of the quality of the cooperation between them in case of a bank run or a banking panic. Answering a question from Simon Rabinovitch, US economics editor for The Economist, Jerome Powell, the chairman of the Fed, said depositors “should assume” they are safe. Around the same time Janet Yellen, the treasury secretary, said that expanding insurance to all depositors is not under consideration. As the editor-in-chief of the magazine wrote, « They can’t both be right ! ».
This is disturbing for two reasons. The first is, as said above by Russell, that claiming that depositors « should feel safe » is ambiguous enough to be a clear sign of the unwillingness to commit and therefore spread defiance toward the banking sector, or at least to its weaker part.
The second reason is that the plurality of opinion from the two top policymakers in the US is weakening further the trust in the solidity of the US banking sector. The willingness of the Treasury secretary not to lift the cap on deposit insurance is understandable. The dimension of a bank panic ( a generalized bank run, not targeting one particular bank but the entire banking system) cannot be foreseen ex ante. It may be so large that it would create havroc on the financial system and in case of a pledge to insure all deposits an unsustainable burden on the federal Treasury. But it also shows that the claim by Biden that the no tax will be used to insure banks is shallow. On the opposite, the assertion by Jerome Powell that depositors should feel safe is both a tentative to instill optimism in the depositors and play on their beliefs and a way to put pressure on the Federal Treasury pointing to its responsibility (and not the Fed) in the case of a run or a panic. The combination of both claims is a further example of the impossibility to commit on the need to insure bank deposits. The contradictions between the two statements prove that the cooperation between the two major public authorities concerned by the stability of the banking system is likely not to be smooth and harmonious.