Moody’s Chief Economist: Customers Will Ultimately Pay to Save SVB, Signature Bank Depositors

On Monday’s broadcast of C-SPAN’s “Washington Journal,” Moody’s Analytics Chief Economist Mark Zandi stated that ultimately, “we all bear the cost” of backstopping the depositors of Silicon Valley Bank and Signature Bank because banks will pass part of the cost on to consumers, but he thinks the backstopping was the least bad decision.

Zandi said, “In terms of who pays, most directly, it’s the banks themselves. Because the FDIC — who is coming in to resolve these failed institutions and pay off depositors and other creditors — pulls that money out of the Deposit Insurance Fund, the fund that’s been established where banks contribute into that for this very purpose, to pay for failed institutions. But clearly, the banks will then try to pass at least some of that along to their customers. So, they’ll eat some of it in the form of less earnings, lower profits, it probably affects the pay of their executives and other employees. But, ultimately, it likely also ends up in lower deposit rates for depositors and higher lending costs for lenders. So, ultimately, the cost is borne broadly by the customers of the banking system, which is most of us.”

He continued, “Now, having said that, the calculation you have to do here is, if the FDIC didn’t step in and resolve those institutions and if the government hadn’t provided those — that kind of strong backstop, what was the counterfactual then? What would have happened? And it felt really — a couple of weeks ago, it felt pretty uncomfortable. It felt like the banking system could come under extreme pressure, we could have deposit runs and then, ultimately, the cost to all of us would be even greater, because the government would have had to step in, provide more support, there would be more failures, and the cost to us would be even greater. So, it’s kind of a no good choice here…I think policymakers made the least bad choice that they had. But ultimately, we all bear the cost of that as customers of the bank.”

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