> What people are now asking for is unlimited insurance, which encourages risk takings amongst banks

Except that when a bank is liquidated, the shareholders get zeroed out, and the executives get their money clawed back, which encourages banks to not risk-take.

As a depositor, this sounds fine to me. I don't benefit from banks doing stupid, risky things, and I shouldn't suffer from it either. Raise the capital requirements. Zero out the shareholders when things go pear-shaped.

The problem is not what happens to the shareholders (they get zeroed out the same way that shareholders of other failing companies would be), but what happens to the depositors. The rules, as written, say that deposits above $250k can be wiped out. The rules, as the government applied to the SVB, made large depositors whole.

So we have the worst of both worlds: no depositor guarantee de jure (so depositors bailed and brought SVB down), but a de facto bailout which has significant actual costs and encourages risky depositor behavior. My 2c.

I think the priority at the federal level is still in at least maintaining a facade of banking system stability. It’s very rare that the bank not only becomes insolvent but also loses all its value. Risky investments to a bank are not really considered super risky elsewhere and the investments still hold value, albeit less if they are trying to liquidate. The problem is when banks are unable to maintain enough cash which happens when they over-invest or when their returns just barely keep up with inflation. There is usually plenty of money that is recoverable, with time, to make depositors whole. The “bail out” concern is a red herring for the actual problem: market consolidation. Larger banks effectively write IOUs to each other depending on who owns who after each day of ACH, wires, deposits, and withdrawals, while smaller banks pay in cash. There is additional burden on, usually, medium-sized banks who need to both maintain large cash reserves but also cover the cost of operations.

You’re conflating liquidity with solvency. The problem isn’t a lack of cash on hand, it’s assets that have fallen in value. Saying that they money will be there, it just takes a bunch of time, denies the reality of the time value of money. A stream of payments of $10/year for ten years is not worth $100. Never has been.

Shareholders are routinely zero’d out in bank failures. Are you proposing some other mechanism?

No, because the mechanism we currently have seems to be working. SMBs are currently scared shitless that they will be reaping the consequences of their actions. Depositors are not.