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Riskless Capital
Article

Riskless Capital

IMF, 2023


Editorial Rating

9

Qualities

  • Analytical
  • Eye Opening
  • Overview

Recommendation

In early March 2023, US regulators placed Silicon Valley Bank into Federal Deposit Insurance Corporation (FDIC) receivership after a bank run had caused the financial institution to fail. In an effort to mitigate financial contagion, regulators extended federal protection to all deposits, not only to those under the FDIC’s usual limit of $250,000. While providing much-needed stability and calming stakeholders, this action may have unleashed moral hazard into the marketplace. Professors Raghuram Rajan and Luigi Zingales explore the potential consequences of “riskless capitalism” in this astute essay.

Take-Aways

  • To avert a banking crisis, the US government insured all deposits at the struggling Silicon Valley Bank.
  • The decision to backstop all deposits highlights how politicized economic decisions undercut free market capitalism.
  • Officials should work to restore “pro-market capitalism.”

About the Authors

Raghuram Rajan and Luigi Zingales are finance professors at the University of Chicago’s Booth School of Business.