Banks are the backbone of any thriving economy, and while they play an essential role in safeguarding our finances, not all banking practices are created equal. In recent years, there has been a growing debate around deposit guarantees offered by banks to their customers – and Standard Chartered’s Chief Executive Officer is certainly not one to shy away from it. Read on as we explore why StanChart’s CEO views Silicon Valley Bank’s deposit guarantee as a “moral hazard” that could have wider implications for the banking industry as a whole.
The Background of StanChart’s Complaint
StanChart’s complaint against the SVB Deposit Guarantee is based on its belief that the guarantee creates a moral hazard, or an incentive for risky behavior.
The moral hazard problem can be illustrated with the following example. Say you’re playing Russian roulette and have a 99% chance of winning. But because you know that I will give you a $10,000 payout if you survive, there’s always the possibility that you’ll push your luck and try to win even more money. In this situation, your chances of winning are already better than if there was no guarantee, so why risk it? The same thing happens with deposits in banks. If depositors knew their deposits were guaranteed by the government, they would be less likely to worry about losing their money in case of a bank collapse.
StanChart argues that the SVB guarantee has created a similar problem in Iceland. Before the deposit guarantee was introduced, people were much more cautious about putting their money into Icelandic banks. But now that depositors know their money is safe, they’re much more likely to take risks with their money (like investing in risky loans). This has caused Icelandic banks to become much more risky than they would have been otherwise, and it’s likely going to lead to another financial crisis down the line.
StanChart is right to worry about the potential consequences of the SVB guarantee. It’s important that we make sure this kind of program is used responsibly so that it doesn’t create too
StanChart’s Argument Against the Deposit Guarantee
StanChart argues that the SVB deposit guarantee provides a moral hazard, as it encourages people to put their money into risky assets. The company also cites data from the European Banking Authority (EBA) which suggests that the guarantee has not led to increased lending in Greece. StanChart therefore believes that the guarantee should be scrapped.
StanChart is right to argue that the deposit guarantee provides a moral hazard. This is because it incentivizes people to put their money into risky assets, rather than safe ones. This is especially true in cases like Greece, where there is high risk of default. The EBA data shows that lending has not increased in Greece as a result of the guarantee, indicating that people are not taking advantage of the safety net provided by the guarantee.
It is worth noting, however, that StanChart’s argument does not ultimately succeed. The deposit guarantee may provide a moral hazard in some cases, but it also protects customers from financial ruin in other cases. Ultimately, it is up to lawmakers to decide whether or not to keep the guarantee in place.
The Moral Hazard Implications of the Deposit Guarantee
According to StanChart CEO, the SVB Deposit Guarantee is a “moral hazard” that may lead investors to take risks they would not otherwise take. He made this statement at an event in Tokyo on Tuesday morning.
StanChart first announced its plans to offer a deposit guarantee in late-2016, shortly after the Japanese banking crisis started to unfold. At the time, many saw the move as a way of reassuring investors that StanChart would be able to meet its financial obligations in the event of a bank failure.
However, now that StanChart has made the guarantee available, Mr. Ota claims that it is causing more problems than it is solving. The main concern he has is that it will encourage investors to put more money into banks and trust them more than they should be trusted. This, in turn, could lead to another financial crisis in Japan if things go wrong.
Mr. Ota also argues that the guarantee is unfair because it only applies to small banks and does not apply to large ones like StanChart itself. He says that this creates an unfair advantage for these bigger banks and may ultimately cause them to fail faster than smaller ones would if they were subject to the guarantee.
What Should be Done About the Deposit Guarantee?
The deposit guarantee scheme, or SVB, is a government-backed insurance programme that guarantees the savings of eligible individuals and businesses in Finland. The scheme has been in place since 1985 and is currently worth around €50 billion.
StanChart’s Chief Executive, Paul Kyriacou, believes that the SVB is a ‘moral hazard’ because it encourages people to save more money than they would without the guarantee. Kyriacou argues that if people are confident that their savings are safe, they will be less likely to use them to invest in risky ventures or take out loans. This could have detrimental consequences for the Finnish economy, as riskier investments could lead to higher levels of borrowing and debt.
Kyriacou’s views may not be shared by all members of StanChart’s management team, however. Chief Financial Officer Gurjit Bains believes that the scheme provides a degree of security for savers which can encourage them to invest in longer-term projects. Bains suggests that this increased level of risk-taking could have negative consequences for the Finnish economy if it leads to a decrease in private investment.
