There has been plenty written on Silicon Valley Bank over the past week and we didn’t feel there was much to add by including another explainer in this email. So we’re going Silicon Valley Bank-adjacent and including this article discussing the idea of moral hazard in banking.
Put simply, a moral hazard arises when one party is incentivised to take more risk because it does not bear the cost of that risk. The classic example is America’s ‘too big to fail’ banks. If the banks know the government will bail them out, does that change how they invest their money?
In the aftermath of the US government guaranteeing the deposits at Silicon Valley Bank, the conversation on moral hazards has been front and centre. Critics have argued that other mid-sized banks will be incentivised to take on more risk in the belief that if those risks do not pay off, the government will also bail them out.
This article goes a step further and argues that government guarantees of deposits create a moral hazard and the banking system would be more stable if the government did not guarantee any deposits at all. It is not an argument we necessarily agree with, but it is an interesting look at the Silicon Valley Bank issue from a slightly different angle and it certainly made us think.
This is an excerpt from our Thought Starters email. Once a week we send you 5 interesting articles that have caught our attention, to get you thinking. No spam, we guarantee.