The FDIC Has a Proven Way to Avoid Moral Hazard

While the government’s quick action to protect depositors at Silicon Valley Bank and Signature Bank somewhat calmed fears of a financial meltdown, it also raised new concerns of instability. The Federal Deposit Insurance Corp. would’ve been better off taking a page out of the 1980s.

Banking necessarily involves taking short-term savings from depositors and investing them in longer-term loans to families and businesses. Because the deposits come due sooner than the loans, no bank could repay all its depositors in the short run. The Federal Reserve is in place, in part, to help banks meet these short-term liquidity needs.