The shareholders getting wiped out and bank management replaced seems like pretty strong incentive for the bank itself not to screw up.
The shareholders lose it all if the bank goes bankrupt. They should have incentive enough to watch over management. If they don’t notice, how does it help for depositors to have their money at risk too?
It's certainly not clear to me why the depositors, as crappy a deal as they got, should be bailed out by unaffected banks that are financially healthy or, as is the case no matter what, the rest of the citizenry should pay.
But I think it's probably economically sound in the long-term as well. That is, asking every depositor with $250K+ to assess the financial health of each bank they use and maybe buy insurance is collectively more expensive than just having the FDIC implicitly insure all deposits.
That's different than asking if it's "fair". But I would wager it's probably more efficient.
Most of the arguments I've seen are effectively arguing that 250K is too low an amount. While that may be true, that was the well-established 'rule of the game'. The FDIC limit was no doubt chosen, as most insured amounts are, to cover the majority of damaged parties, for an acceptable cost.
This isn't grandma or Joe/Jane Public losing their life savings; the FDIC insurance easily covers the vast majority of individuals depositing cash. These are businesses that have, or should have, the financial wherewithal and resources to mitigate their risk beyond the FDIC baseline.
If paying for deposit insurance were available for large accounts, I expect many businesses would choose it. Might as well make it the default?
Perhaps I'm wrong but I suspect a much higher share of deposits are under $250K than the 3% at SVIB. The larger deposits are likely from companies doing a much better job of spreading counterparty risk around, ie traditionally managed companies.
As a college student I worked as an office temp at the hq of an midsized areospace company. They had a Treasurer, Asst Treasurer and clerk. Part of my job every morning was to get the short term deposit rates from a list of banks whom they did business with. They then would place their excess cash with a number of those banks.
More recently, I was president of an HOA. Over a span of 5 years we built up a reserve account to just over $1M for a planned capital improvement. Every 250K we opened a new bank account. Had there been a delay in starting the project we would have opened a 5th.
So yeah, the Treasuer and staff of all of these companies should be taken to the woodshed and most likely fired for incompetency.
Wouldn't it have been more useful if that job simply didn't have to exist, and they could just deal with one bank, and then that extra capital could have gone to something more useful?
Change the game so the risk is being managed in a way that doesn't require every single company to wastefully play financial hopscotch so they can instead focus on doing what they do best.