Ideas such as unlimited deposit insurance sound like a panacea for market concerns about the banking sector, but they strike fear in the hearts of some bank experts.
In light of concerns over more bank runs like the one on Silicon Valley Bank, commentators and government officials are discussing expanding the current $250,000 cap on deposit insurance or even insuring all bank deposits.But the proposal to insure all deposits strikes fear in the hearts of some bank experts for a simple reason: In the past, blanket insurance has led to the emergence of “zombie banks.
“They basically do a ton of bad lending,” said Viral Acharya, an economics professor at New York University Stern School of Business. Acharya was speaking at a discussion about the aftermath of the collapse of Silicon Valley Bank at the school on Tuesday night. The poster child for zombie banks, he said, is the Bank of Cyprus, “which bet all of its capital on Greek debt, even when Greece was actually blowing up.” The collapse of the bank led to a bailout of Cyprus itself by international creditors including the European Central Bank in 2013.
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