And the bulk of that capital is uninsured.
If the big depositors panic at the possibility of losing all their uninsured money, like what happened at SVB, the banks don't have the capital to fulfill the withdrawals. They would collapse.
So they are going to the discount window for cash.
I think we can agree that if depositors panic (or “panic” is intentionally spread!) and enough money is rapidly withdrawn from
any bank, it will suffer a liquidity crisis without outside assistance.
That has happened throughout history to private banks big and small. In today’s society, where panics can be spread by social media and rapid withdrawals made on the internet, this particular threat is exacerbated.
However, I don’t think the banking system as a whole will be devastated by “social media” panics or “bank runs.” Of course things could get hairy if we find ourself with a mad populist President out to destroy the Federal Reserve System and “Deep State” out of spite.
No amount of raising “capital reserves” will ever be sufficient to abolish this danger entirely, since it is a characteristic weakness of any fractional reserve bank system. As you correctly point out in comment #116, there are plenty of other technical problems that could emerge, and there is even the threat of civil war, war with Russia or China, or a genuine global economic decoupling in a new Cold War.
Right now the rapid interest rate changes have raised the risk calculus for many banks, but over time this should ameliorate and even prove beneficial. The move to a concentration of deposits in very large banks does seem pretty inevitable however.
As you and others have pointed out, risk can’t be taken out of a private banking system entirely without encouraging “moral hazard.” Discipline ought to be encouraged on the part of investors, “savers,” and … also corporate management and bank CFOs! Everyone should re-adjust their expectations in this new era. The raising of interest rates will slowly tend to re-impose some discipline (including on our Federal government), but of course it will have other effects too.
Personally, I am hoping for a major and sustained global stock market decline, but the stock market is continuing to rise. This arguably shows that we are still psychologically locked into an era of high expectations by capitalists and ridiculous financial “asset inflation.”
