<p>Usually the government effectively guarantees 100% of deposits anyway when push comes to shove. For example, with SVB, the US government quickly came out with a statement that depositors will be made whole, even though the FDIC only formally guarantees a certain amount.</p>
<p>Why the de jure guarantees can differ from de facto guarantees can have multiple reasons, including budgetary limits and political considerations. The trade-off between bad long term effects of moral hazard and bad short-term effects of self-fulfilling bank runs could also play a role, though I think this is not the main reason.</p>

CC BY-SA 4.0
2023-03-18T04:54:50.170Z
2023-03-18T04:54:50.170Z
BB King
<p>I understand the concept of moral hazard. If a government guaranteed all bank deposits 100%, bank customers would simply go to the bank with the highest interest rates and rely on the guarantee that they couldn't lose anything. It guarantees 100% up to some (relatively) small limit (£85,000 in the UK) , because private individuals and very small businesses aren't in a position to judge how sound a bank may be.</p>
<p>However, it seems very harsh to destroy a small or start-up business should its bank fail, and the business suffer a complete loss of its capital. Also, that's not good for the wider economy, and perhaps might trigger a much wider financial crisis.</p>
<p>Why don't governments guarantee a fraction of larger deposits? Say 90%. It seems to me that a business which cannot survive a 10% &quot;haircut&quot; is a business that was probably headed for bankrupcy in the near future anyway. A better business would be able to keep going, and either modify its spending plans, or seek replacement funding for the 10% lost in the failed bank. But there would be no &quot;moral hazard&quot;, because no business would want to risk 10% for the sake of a small fraction of a percent in interest. It would check the financial state of its banker to the best of its ability (which for a small business,  is somewhat limited!)</p>
<p>Also, is the 100% guarantee up to a limit wise? Would making it 99% or 95% cause any systemic instability? I was once personally rescued when the Icelandic banks collapsed. I was astounded that I actually got back the interest I had been promised, as well as my capital. I'd have almost-happily accepted losing a few percent interest.</p>
<p>(90%  is an arbitrary fraction I plucked out of the air.)</p>
<p>This question obviously prompted by the recent failure of SVB.</p>

CC BY-SA 4.0
2023-03-15T18:46:25.807Z
@user253751 Can all businesses obtain such insurance? I'm thinking of start-ups and small businesses, not large ones. I haven't heard of it, but I'm not running a business.
nigel222
CC BY-SA 4.0
2023-03-16T08:12:59.130Z
No business has the majority of its assets in deposits. Many medium sized companies anyhow have accounts at different banks. There is also little risk for a wider financial crisis if some small startups fail because one bank fails. It's the same if a business fails because it's largest trading partner fails. At the end of the day, you cannot and shouldn't guarantee everything for everyone.
Alex
CC BY-SA 4.0
2023-03-16T16:27:46.193Z
@Alex I believe start-ups may have a significant part of their assets in cash. They've raised cash by selling equity, and intend to live off the cash while developing and/or marketing the product.
nigel222
<banking><central-banking>
Bank runs, deposit guarantees, and moral hazard
nigel222
# Bank runs, deposit guarantees, and moral hazard

(Asked by: username_0 on 2023-03-15)

I understand the concept of moral hazard. If a government guaranteed all bank deposits 100%, bank customers would simply go to the bank with the highest interest rates and rely on the guarantee that they couldn't lose anything. It guarantees 100% up to some (relatively) small limit (£85,000 in the UK) , because private individuals and very small businesses aren't in a position to judge how sound a bank may be.

However, it seems very harsh to destroy a small or start-up business should its bank fail, and the business suffer a complete loss of its capital. Also, that's not good for the wider economy, and perhaps might trigger a much wider financial crisis.

Why don't governments guarantee a fraction of larger deposits? Say 90%. It seems to me that a business which cannot survive a 10% "haircut" is a business that was probably headed for bankrupcy in the near future anyway. A better business would be able to keep going, and either modify its spending plans, or seek replacement funding for the 10% lost in the failed bank. But there would be no "moral hazard", because no business would want to risk 10% for the sake of a small fraction of a percent in interest. It would check the financial state of its banker to the best of its ability (which for a small business, is somewhat limited!)

Also, is the 100% guarantee up to a limit wise? Would making it 99% or 95% cause any systemic instability? I was once personally rescued when the Icelandic banks collapsed. I was astounded that I actually got back the interest I had been promised, as well as my capital. I'd have almost-happily accepted losing a few percent interest.

(90% is an arbitrary fraction I plucked out of the air.)

This question obviously prompted by the recent failure of SVB.

**Tags:** banking, central-banking

> **Comments:**
> **username_0**: @user253751 Can all businesses obtain such insurance? I'm thinking of start-ups and small businesses, not large ones. I haven't heard of it, but I'm not running a business.  
> **username_1**: No business has the majority of its assets in deposits. Many medium sized companies anyhow have accounts at different banks. There is also little risk for a wider financial crisis if some small startups fail because one bank fails. It's the same if a business fails because it's largest trading partner fails. At the end of the day, you cannot and shouldn't guarantee everything for everyone.  
> **username_0**: @username_1 I believe start-ups may have a significant part of their assets in cash. They've raised cash by selling equity, and intend to live off the cash while developing and/or marketing the product.  

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## 1 answers

### Answer by username_2 on 2023-03-18. Score: 1

Usually the government effectively guarantees 100% of deposits anyway when push comes to shove. For example, with SVB, the US government quickly came out with a statement that depositors will be made whole, even though the FDIC only formally guarantees a certain amount.

Why the de jure guarantees can differ from de facto guarantees can have multiple reasons, including budgetary limits and political considerations. The trade-off between bad long term effects of moral hazard and bad short-term effects of self-fulfilling bank runs could also play a role, though I think this is not the main reason.


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