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Riskless Capital

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Riskless Capital

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The federal government may have unleashed moral hazard into the financial system.

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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.

Summary

To avert a banking crisis, the US government insured all deposits at the struggling Silicon Valley Bank.

The demise of Silicon Valley Bank (SVB) in March 2023 sent shockwaves through the banking system and financial markets. SVB’s swift demise placed the system at risk of contagion, so the Federal Deposit Insurance Corporation (FDIC) placed the entity into receivership. The federal government chose to guarantee that all depositors – not only those maintaining the FDIC limit of $250,000 or less in the bank – would have full access to their funds.

What the US Treasury won in short-term financial stability could be lost through long-term systemic fragility. Specifically, the guarantee of deposits with values greater...

About the Authors

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

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