The rescue of SVB and Signature Bank depositors leaves the incentive for bank runs, Wharton finance professor says

• The rescue of Signature and SVB depositors leaves the incentive for bank runs, a Wharton professor said. 
• Regulators want to treat those banks as special cases, Itamar Drechsler told Insider.
• "The contagion risk is that there is a run on other banks that are financed by a large fraction of uninsured deposits."

The rescue of uninsured depositors at Signature Bank and Silicon Valley Bank still risks further bank runs, according to Wharton finance professor Itamar Drechsler.

While the intervention on Sunday may have backstopped some damage, the potential for further downside remains, he told Insider.

"One obvious issue is that the plan treats the two banks, SVB and Signature, as a special case, in the hopes that this will not have to be done for many other banks," said Drechsler. "But then it leaves the incentive for uninsured depositors at other banks to run."

He added that deposits in the form of corporate checking accounts or cash that the bank used to buy long-maturity, fixed-rate assets such as mortgage-backed securities are at particular risk.

That's how SVB's collapse started. Last week, the bank announced a $1.8 billion loss on the sale of a bond portfolio to help cover increasing deposit withdrawals, triggering a run on the bank. 

"The contagion risk is that there is a run on other banks that are financed by a large fraction of uninsured deposits," Drechsler said. "Many of these accounts did not think there was any problem to be concerned about before the news about SVB and the other banks that have failed, but now they have a reason to be concerned and to take out their deposits and move to other banks."

Some commentators, including Senator Bernie Sanders, have pointed to Trump-era rollbacks of the Dodd-Frank Act as reason for the bank failures.

The changes made in 2018 exempted regional banks like SVB from stricter regulatory standards that were passed after the Great Financial Crisis.

Barney Frank, who co-authored the original bill and helped oversee Signature Bank, doesn't blame Trump's policy changes, however. 

"The vindication of the bill is that nobody is talking about anything like 2008," Frank said, per Bloomberg. "If the bill hadn't been passed, we'd be seeing a lot more damage these days. We got a lot of the vulnerability out of the system."

Editor's note: the headline was changed to reflect the view that new federal backstops on deposits keep in place incentives on bank runs, instead of creating them.