Warren Buffett warns bank crisis is not over and depositors' cash is still at risk

The collapse of Silicon Valley Bank and Signature Bank has prompted the Federal Deposit Insurance Corp. to question why bank deposits should bear any risk at all. Insuring all deposits would eliminate the fear of losing cash, potentially prevent bank runs, and save the FDIC from sending a $15.8 billion bill to cover costs from rescuing uninsured depositors. However, some argue that fear is necessary to bring discipline to markets and encourage responsible financial management.

Billionaire Warren Buffett points out that runs still happen because people misunderstand the fact that the FDIC and US government have no interest in having a bank fail. Uninsured depositors do not think enough about risk in normal times, while all depositors are likely to panic at exactly the times when panicking will cause the most chaos. Increasing deposit insurance and tightening control over risk-taking would create a very inflexible system with less credit available.

The FDIC is trying a different approach by charging banks based on the amount of uninsured deposits on their balance sheet. This incentivizes them against relying too much on this kind of funding in the future and keeps both depositors and bankers honest. However, there should be greater penalties for bad management or negligence instead of relying on the state to guarantee all cash.

Flat-out guaranteeing all deposits would remove the incentive for bank executives and shareholders to worry about the risks they take with people's money. This would likely encourage them to take bigger risks with the potential for greater rewards, leaving the state to cover the losses. Instead, financial justice should be implemented to hold bankers and their leaders accountable for their actions.