3 ms·
Do depositors have some sort of moral superiority to investors, or simply a legal priority? Citibank equity holders (one of the the more egregious bailouts fro
by JackFr 4y ago
Do depositors have some sort of moral superiority to investors, or simply a legal priority?
Citibank equity holders (one of the the more egregious bailouts from the GFC) 15 years later are still down 90%. So it’s not like in the bad old days of 2008 investors were getting off scot free.
- vkou 4y ago> Do depositors have some sort of moral superiority to investors, or simply a legal priority? Depositors don't stand to benefit from a bank engaging in stupid risky bets with depositor money. Investors do (on the upside of those bets). This is why depositors should (and do) have moral priority for their money. Investors also are able to directly control the degree of stupid risk-taking behaviour taken by the bank, by virtue of their control of the board. Depositors have no such leverage. If you make depositors (or the public at large) pay for the sins of the bank's management, you get a classic conflict of interest problem. If you make investors pay, it goes a long way towards aligning their interests with keeping the bank running well.
- Jochim 4y agoWhile I largely agree, it could be argued that banks engaging in risky behaviour might attract depositors with higher interest rates than a more responsible bank. If depositors know that their money is fully covered, you incentivise them to move their money from responsible banks to irresponsible ones. It's easy to imagine a knock-on effect where responsible banks are incentivised to behave less so in order to retain custom, with the whole system becoming more fragile as a result.
- vkou 4y agoYou can make that argument, but just like a spherical cow, it has no bearing on reality. SVB and it's ilk offered the same non-existent interest rates as any other non-distressed bank.