Lack of consequences encourages bad behavior

David MoonBlog

If you want your child to believe that you will punish him for not making his bed, you have to punish him when he doesn’t make his bed. Every time. If you threaten punishment and never follow through, you just encourage him to not make his bed. And if you only occasionally follow through, you are encouraging him to evaluate probabilities, risk and reward – but you aren’t likely to get the behavior you seek.

That is the U.S. banking regulatory system.

I’m guessing there are some bank regulators and federal officials whose kids never made their beds. And as a result, bank depositors are left to guess when the federal government might really mean it when they say bank deposits are insured only up to $250,000.

One of the several factors that placed Silicon Valley Bank at risk was that 94% of its deposits exceeded the (now seemingly irrelevant) FDIC insurance limits. These are considered “hot deposits” that are easily withdrawn – and most likely to be withdrawn if depositor confidence in a bank suddenly plummets. If none of SVB’s depositors exceeded the insurance limits, no bailout would have been needed. I suspect that the bailout of the SVB depositors was not an effort to help those companies with uninsured deposits, but was instead a signal to depositors not to panic and pull their excess deposits from their accounts at the other 4,200 banks in the U.S.

That is, by bailing out SVB depositors who willingly and knowingly exceeded FDIC insurance limits, officials are encouraging more of the behavior that contributed to the second largest bank failure in U.S. history.

People in elected or appointed positions want to deliver candy bars and donuts, when a steady diet of those leads to long-term problems. We have once again privatized economic gain while allowing the public to assume the cost of failure. And just as three years of artificially low interest rates and massive monetary expansion set the stage for these bank failures, expanding deposit insurance with a wink and nod sets the stage for some future crisis.

It is unrealistic to expect most customers to analyze the financial health of their local bank, which is why FDIC insurance exists. But there were at least 5 companies with more than $50 million on deposit at SVB, all of which surely had at least one person on the payroll who could read a financial statement. Rather than provide after-the-fire insurance coverage to large depositors, they should have the option of paying for coverage on amounts above the $250,000 limit – or they should lose everything above $250,000 when their bank fails.

Otherwise, no one will ever make their bed.

David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.