The bank reform that will harm the American economy and US politics

IN THE wake of the failures of Silicon Valley Bank and Signature Bank – the second- and third-largest bank failures in American history – members of Congress are debating what should be done to prevent future failures. Some have zeroed in on a new proposal to provide a governmental guarantee to bank deposits of any size.

This is a mistake. The current limit, US$250,000 per person, is more than adequate for any banking needs an individual might have. An unlimited guarantee to banks that their debts to depositors will always be 100 per cent backed by the government is an invitation for the banks to print money with Uncle Sam’s credibility, but for their private profit. It is a government benefit that would aid the wealthiest among us, at a price to be borne by the rest of us.

Some have linked any such expansion to a corresponding increase in the rigour of bank supervision and regulation. The failures of Silicon Valley Bank certainly illustrate how much more rigorous bank supervision should become. But a quick look at banking history shows that linking expansions of public guarantees to tighter supervision is doomed to fail.