The government’s failure to restore trust in the banking system

Almost no one understands how banks and bank accounts work — and the government isn't helping.

Why it matters: All stable banking systems stand on a solid bedrock of trust. When that trust is eroded, only government can rebuild it. The problem is that government actions haven't managed to rebuild the trust that was lost over the long weekend of March 10.

The big picture: The failure of Silicon Valley Bank destabilized much of the U.S. and even global banking industry by causing a massive psychological recalibration of what constitutes a "safe" place to hold money.

• Deposits are information-insensitive assets — they're, literally, money in the bank. When people even ask whether they're safe or not, that thwarts financial-stability goals.

Flashback: SVB deposits might be safe now, but for a whole day on Friday March 10, they weren't. The bank was taken over by the FDIC before most of its branches opened in California, and for the rest of that day — plus all of Saturday and nearly all of Sunday — customers with more than $250,000 in the bank were objectively terrified that they might lose most of their money.

• That fear wasn't entirely rational. People who understand how both bank balance sheets and the FDIC work knew that at a minimum uninsured depositors would have access on Monday morning to more than enough money to make payroll, and would ultimately lose little if anything.
• Many rich and influential VCs and Silicon Valley thought leaders, it turns out, don't understand how bank balance sheets and the FDIC work.

Be smart: Fear is highly contagious, and the VCs' fears spread rapidly in a way that has proved hard to quash.

• The virality of worries about deposit safety was turbocharged by the fact that it was never particularly rational in the first place to have enormous sums just sitting on deposit at a bank — not when T-bills can yield as much as 5%.
• SVB's failure therefore acted as a wake-up call that made cash-rich individuals and companies realize their money wasn't working for them and could — should — be invested more wisely elsewhere.
• From the point of view of a bank, of course, that kind of outflow is very hard to distinguish from a bank run.

What they said: "Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system" said the government's press release on the Sunday after SVB failed.

• The catch: There's no magical "public confidence" button Treasury or the Fed can push. Instead, what we got were dry press releases saying things like "the BTFP will be an additional source of liquidity against high-quality securities."
• In other words: The government relied on journalists to reshape the press releases into a compelling English-language message of "don't panic, there's nothing to worry about."

Be smart: That's just not what journalists do.

• Journalists, by nature, seek out exciting news. Panicked depositors are news, especially when they cause bank stocks to plunge. So are plunging bank stocks. Reporting on both causes more people to withdraw their deposits, not fewer.
• "Meh, move along, nothing to see here" is not a headline you'll ever see — and even if it did appear, it probably wouldn't reassure anybody.

The bottom line: If the government's aim here is to lull depositors back into their prior state of complacency, it isn't working.

Go deeper: To reassure Americans their deposits are safe, bring in the politicians