Svb, because Giavazzi’s turboliberal theories on bank deposits are dangerous
The theses of the Bocconian economist Francesco Giavazzi illustrated on the front page of the Corriere della Sera after the Silicon Valley Bank case are being debated. Giuseppe Liturri's comment
We don't know how many times Professor Francesco Giavazzi has joined a company. But we can speculate that, if he ever did, he kept well away from the CFO's office.
One cannot draw a different conclusion after reading that “The US government also said it would bail out all depositors of failed banks. This is a mistake: in the United States federal insurance already protects all bank deposits up to an amount of $250,000. If an investor is foolish enough to deposit larger sums in a single bank, it is right that he pays the consequences. Especially if, as happened in the case of Svb, that investor is a company that manages a cryptocurrency”.
Perhaps it escapes Professor Giavazzi that even a normal small or medium-sized Italian company (let alone the US ones) can hold cash on demand for figures well in excess of 250,000 dollars. You pay your suppliers, you receive cash from your customers, you pay your employees. And you work with balances that are often measured in millions of euros or dollars. Normal things, for those who work there in a company.
Just to give an example, the Italian Treasury also holds liquid assets in the order of tens of billions, a liquidity cushion at the service of the daily flows of income and expenditure. What are we doing? Are we asking him to open tens of thousands of 100,000 euro accounts (the limit on guaranteed deposits in Italy)?
Or, according to Giavazzi, do we call the Minister of the Economy or the Chief Financial Officer of any medium-sized company “crazy”?
THE RESCUE OF DEPOSITORS
Guaranteeing (de facto) all depositors was a preventive move by the US authorities , after a real race to withdraw deposits from less solid banks in favor of more solid banks had already started on Wednesday. At least on paper. Thus determining the most classic of self-fulfilling prophecies.
This is not a question of rescuing imprudent and greedy (for a simple bank deposit?) investors but of guaranteeing the normal functioning of the payment system.
Do we want to remember what happened in Cyprus in 2013, with the banks closed for weeks, deposits of over 100,000 euros reduced to waste paper and limits on capital movements that lasted two years, precisely to prevent depositors from running over the counters?
GIAVAZZI'S THOUGHTS ON RISK AND INNOVATION
Giavazzi believes that risk must exist because it stimulates innovation, on which Silicon Valley companies have built their prosperity and excessive regulation and controls would eliminate volatility which is the measure of risk. But this reasoning is out of place when applied to bank deposits. We find it hard to believe that making them risk-free by effectively guaranteeing them unlimited would create moral hazard and discourage innovation. To risk and suffer the relative losses "justly", there are shareholders and bondholders ready to respond. And it does not appear that in the US the banks involved have used depositors' money to invest in complex financial derivative instruments.
We would therefore suggest leaving bank deposits alone and worrying about what could happen in Europe where – admitted and not granted that it is true that supervision should not allow a bank to end up like Silicon Valley Bank – if something similar unfortunately happened, we would leave willingly Giavazzi the task of stopping the panic of savers.
The deepening:
Svb, here is the US bailout for depositors (impossible in the EU) . Liturri's analysis
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/silicon-valley-bank-tesi-francesco-giavazzi/ on Wed, 15 Mar 2023 06:22:29 +0000.