> If payment is done by other banks, doesn't that serve as mitigation?

Seems the exact opposite. Why would any bank ever conduct risk assessment if their potential failure will be paid by the industry as a whole. This effectively tells any other bank that might be fearing for a bank run to stock up on super risky assets and to let the dice roll to see if they end up winning big, or if their competitors end up paying for their losses.

This is not the moral hazard risk he was referring to. The bank still has no incentive to load up on overly risky investments because in the case of an FDIC takeover, they (the investors and executives) will still loose everything. The moral hazard here is for depositors. They have an incentive to put their money in the bank with the highest possible yield no matter what the bank's investment portfolio looks like, since their deposits are now seemingly guaranteed by the banking system as whole.

To be fair, I'm not sure if this is necessarily a bad thing for certainly types of very low yield accounts (checking accounts with no interest, etc). But there certainly is an element of moral hazard at play.

Because the owners of SVB lost everything, it's only the customers that are being made whole.

It’s really amazing the number of people that don’t seem to understand that. It would be like if a dairy farmer overloaded his truck, crashed it and died. The government steps in and makes sure everyone gets milk while they sell off the cows. Then people say “this creates a moral hazard for dairy farmers to overload their trucks without consequences!”. No, dude. He died.

This is incorrect. The correct analogy would be if I set the speed of my automated truck to 20mph over the speed limit causing me to earn 10% more income for 10 years. Then the truck crashes and burns and my neighbors pay for it.

Pay for it to who?

I’d agree that’s what happens with the big rescue loans that save businesses. But, that’s not what’s happening here. There just such extreme hyperbole about how this removes all risk for banks.

I guess where I can meet you in the middle is that in this crash from excessive speed (not over the speed limit, but only because they lobbied to have the speed limit raised) the customers are getting taken care of, the business owner loses his business and his competitors have to pay for the cleanup.

I’m curious how the banks feel about this. I really don’t believe that doubt about the banking industry is in their favor, even if it could be a differentiator in theory. The amount they’ll pay is a tiny fraction compared to the market cap lost this week.

Dude, a depositor provides funds. Might get them back with interest, or not.

Thats not the definition of a customer, thats the definition of an investor.

The fact that it is supposed to be a low risk low return investment does not change that fundamental relation.

Fine, lender. Doesn’t change my analogy. My point is this question is easily answered.

> Why would any bank ever conduct risk assessment if their potential failure will be paid by the industry as a whole.

So the bank doesn’t go under, causing them to lose their jobs and equity.

"lost everything" — they sold stock and received bonuses before the takeover.

But it’s not other banks - it’s customers of other banks.

that seems like a bit of a silly argument. By that token any time we fine a bank we're not fining the bank, but the bank's customers?

FDIC is arguing that taxpayers will not be affected because they are bankrolling this backstopping operation by forcing other banks to cover losses beyond the limit.

But banks will most likely recover this imposed “fine” from customers, which means that customers (aka: taxpayers) are the ones who are ultimately bankrolling this whole fiasco.

I get what you're saying. But by that token any fines that are levied against banks are also paid by taxpayers. So if you're saying that this move is wrong since it puts the burden on taxpayers, then we shouldn't fine banks either?

The only thing I’m saying is that - technically - taxpayers are footing this bill, even if FDIC claims otherwise. Whether or not this backstop should have even happened in the first place is a different issue.