The government’s response to the collapse of two major banks has already cost hundreds of billions of dollars. So will ordinary Americans pay for it one way or another? And what will the price be? It could be months before the answers are fully known. The Biden administration said it will guarantee uninsured deposits at both banks. The Federal Reserve announced a new lending program for all banks that need to borrow money to pay for withdrawals.
On Thursday, the Fed gave its first glimpse of the scale of the response, saying banks borrowed about $300 billion in emergency funding over the past week, with nearly half of that amount going to holding companies to make the two failed banks pay depositors could. The Fed didn’t say how many other banks have borrowed money, adding that it expects to repay the loans.
The aim is to prevent a spreading panic in which customers rushed to withdraw so much money that even healthy banks buckled. This scenario would unsettle the entire financial system and derail the economy.
Taxpayers are unlikely to bear any direct costs for the failures of Silicon Valley Bank and Signature Bank. However, other banks may need to help cover the cost of covering uninsured deposits. Over time, these banks could pass higher costs on to customers, forcing everyone to pay more for services.
Here are some questions and answers about the cost of bank failure:
How is the answer paid?
Most of the cost of guaranteeing all deposits at both banks will likely be covered by proceeds received by the Federal Deposit Insurance Corp. from the resolution of the two banks – either by selling them to other financial institutions or by auctioning off their assets.
Any costs beyond that would be paid out of the FDIC’s deposit insurance fund, which is normally used when a bank fails to reimburse depositors up to $250,000 per account. The fund is managed with fees paid by participating banks.
Both Silicon Valley and Signature banks had a strikingly high proportion of deposits above that amount: 94% of Silicon Valley deposits were uninsured, as was 90% of Signature deposits. The average for large banks is about half that.
If necessary, the insurance fund will be replenished through a “special assessment” of banks, the FDIC, the Fed and the Treasury Department said in a joint statement. Although the cost of this assessment could ultimately be borne by bank customers, it is not clear how much money it would be.
Columbia University law professor Kathryn Judge said greater costs to consumers and the economy could result from potentially major financial system changes resulting from this episode.
If all customer deposits were formally or informally guaranteed by the government, regulations would need to be tightened to prevent bank failures or reduce their costs when they do occur. Banks may have to permanently pay higher fees to the FDIC.
“It will require us to rethink the entire regulatory framework for banks,” Judge said. “It’s far more significant than the modest charges other banks pay.”
Are the taxpayers hooked?
President Joe Biden has insisted that no taxpayer money will be used to solve the crisis. The White House is desperate to avoid any perception that the average American is “bailouting” the two banks, much like the hugely unpopular bailouts of the biggest financial firms during the 2008 financial crisis.
“No losses related to the resolution of Silicon Valley Bank will be borne by the taxpayer,” said the joint statement from the Treasury Department, the Fed and the FDIC.
Treasury Secretary Janet Yellen defended that view under tough questioning by GOP lawmakers on Thursday.
The Fed’s lending program to help banks pay depositors is backed by $25 billion in taxpayer money, which would cover any losses on the loans. But the Fed says the money is unlikely to be needed as the loans are backed by government bonds and other safe securities as collateral.
Even if taxpayers aren’t exactly on the hook, some economists say banks’ customers can still benefit from government support.
“To say that the taxpayer won’t pay anything ignores the fact that providing insurance to someone who hasn’t paid for insurance is a gift,” said Anil Kashyap, an economics professor at the University of Chicago. “And something like that happened.”
So is this a bailout?
Biden and other Democrats in Washington deny their actions amount to any type of bailout.
“It’s not a bailout like 2008,” Sen. Richard Blumenthal, a Connecticut Democrat, said this week as he proposed legislation to tighten banking regulations. “It is indeed a depositor protection and a pre-emptive measure to stop a run on other banks across the country.”
Biden has stressed that bank managers will be fired and their investors will not be protected. Both banks will no longer exist. In the 2008 crisis, some financial institutions that received state aid, such as insurer AIG, were saved from certain bankruptcy.
But many economists say Silicon Valley Bank’s depositors, which included wealthy venture capitalists and tech startups, are still receiving government aid.
“Why is it sound capitalism for someone to take a risk and then be protected from that risk when that risk actually occurs?” asked Raghuram Rajan, University of Chicago finance professor and former governor of India’s central bank. “In the short term it’s probably good in the sense that you don’t have widespread panic. … But it’s problematic for the system in the long term.”
Many Republicans on Capitol Hill argue that smaller community banks and their customers will bear some of the cost.
Banks in rural Oklahoma “are about to pay a premium to bail out millionaires in San Francisco,” Senator James Lankford, an Oklahoma Republican, told the Senate.
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