Bailing out uninsured deposits encourages bank runs

  In the failure of Silicon Valley Bank and Signature Bank, U.S. officials decided to cover all the uninsured deposits in both banks — that is, deposits that exceeded the $250,000 insurance coverage of the FDIC. The belief was that failing to cover those uninsured deposits ran the risk that bank runs could spread to more banks. Covering those uninsured deposits was intended to calm depositors in other banks, which would thereby make more bank runs less likely.

What does ‘moral hazard’ mean? A scholar of financial regulation explains why it’s risky for the government to rescue banks

  “Moral hazard” refers to the risks that someone or something becomes more inclined to take because they have reason to believe that an insurer will cover the costs of any damages.

  The concept describes financial recklessness. It has its roots in the advent of private insurance companies about 350 years ago. Soon after they began to form, it became clear that people who bought insurance policies took risks they wouldn’t have taken without that coverage.