The ‘moral hazard’ of a higher federal insurance limit on US bank deposits

PLANS to vastly expand the Federal Deposit Insurance Corporation (FDIC)‘s safety net restored investor confidence in banks such as First Republic and the US stock market this week, but these moves could well stall or even backfire.

The current banking crisis, as Treasury Secretary Janet Yellen pointed out on Tuesday (Mar 21) as she hinted at those plans, is a classic bank run, rather than an asset-related blow-up.

Millions of Americans – suddenly worried about the safety of their bank deposits – are trying to withdraw cash, making this worry a reality. Compared to previous crises involving abstruse derivatives, this one is devilishly simple. It may also be harder to contain.