The recent failure of Silicon Valley Bank (SVB) has been in the news a lot lately. Banks fail from time to time, but SVB's failure has been highly publicized and has captured Americans' interest. Recognizing the potential for contagion, the US government announced that all depositors at SVB would have access to their money.
It is likely that the depositors wouldn't have lost their money anyway. Long lines of banks are eager to acquire SVB's accounts. The government's message was redundant with what some already knew, but it was important for Americans to hear then.
Successful economies are built on successful banks. Successful banks are built not on deposits but on the trust and confidence of their depositors. When depositors lose confidence, it spreads like a disease. A run by depositors on a small regional bank can affect the balance of the entire region's banking sector. Panic sets in.
Lombard Street: A Description of the Money Market (1873) highlights the importance of central banks to avert panic and the tools they can use to do so, one of which is to lend freely and early. The FDIC, essentially an arm of our central bank, did just that by providing instant access to accounts for depositors at SVB.
Additionally, the Federal Reserve rolled out the new Bank Term Funding program to provide credit to banks for protection against withdrawal runs. These moves prove the Fed's intention is more to ensure the average American citizen will remain confident in their banks rather than providing liquidity for depositors at a relatively small bank in Southern California.
When the lender of last resort has to respond to reaffirm trust in the banking sector, it is likely too late. Overreaction will follow. Financial regulation will tighten. Small regional banks will feel the effects the most. The big banks will get even bigger. Then there will be calls for deregulation. And the cycle will repeat itself.