The federal government immediately mobilized in response to the collapse of Silicon Valley Bank (SVB) and Signature Bank, working over the weekend to insure depositors who had more than $200 billion in venture capital and high-tech startup money stashed in the two banks.
But unlike the 2008 financial crisis, when Congress passed new legislation to bail out the nation’s biggest banks, the current bailout is smaller in scale, applies to just two banks, and isn’t additional taxpayer money — for now.
To ensure depositors can still withdraw funds from their accounts – the vast majority of which exceeded the $250,000 limit for standard insurance from the Federal Deposit Insurance Corporation (FDIC) ̵[ads1]1; regulators say they are drawing from a special fund maintained by the FDIC called the Deposit Insurance Fund (DIF ).
“For the two banks that were put into receivership, the FDIC will use funds from the deposit insurance fund to ensure that all depositors are made whole,” a Treasury official told reporters Sunday night. “In that case, the funded deposit insurance bears the risk. These are not funds from the taxpayer.”
Where the money comes from
The money in DIF comes from insurance premiums that the banks are required to pay to it, as well as interest earned on funds invested in US bonds and other securities and liabilities.
This is why some observers have said that the term “bailout” should not be used in reference to current government intervention – because it is bank money plus interest used to insure depositors, and it is administered only by the federal government.
But standing behind the DIF is “the full faith and credit of the United States government,” according to the FDIC, meaning that if the DIF runs out of money or runs into a problem, the Treasury can call on taxpayers as a next resort.
This is not an impossibility. DIF had a balance sheet of $125 billion as of the last quarter of 2022 and SVB reported $212 billion in assets in the same quarter. Treasury officials were heard on Sunday evening confident that the money in DIF would be more than enough to cover SVB’s deposits.
Fed favors backup
To settle fears of a potential shortage, the Federal Reserve announced an additional line of credit known as a Bank Term Funding Program, which offers loans of up to one year to banks, credit unions and other types of depository institutions. For collateral, the Fed will take US bonds and mortgage-backed securities, and the line of credit will be backed by $25 billion from the Treasury’s $38 billion Exchange Stabilization Fund.
“Both of these steps are likely to boost confidence among depositors, although they stop from an FDIC guarantee for uninsured accounts that was implemented in 2008,” analysts for Goldman Sachs wrote in a Sunday note to investors.
“The Dodd-Frank Act limits the FDIC’s authority to issue guarantees by requiring Congress to pass a joint authorization resolution, which is only marginally easier than passing new legislation. Given the actions announced today, we do not expect actions in the near future term in Congress provides guarantees”, they wrote.
Despite the fact that no new legislation has been introduced in response to the current bank failures, many analysts point out how taxpayer dollars are still being put at risk by the situation.
“I consider [this] a bailout,” economist Dean Baker of the Center for Economic Policy and Research, a left-leaning think tank, told The Hill in an email.
“It puts taxpayer dollars at risk (we can’t end up paying anything) for a group of people, big depositors, who are not entitled to it. I think it was the right thing to do, given the reality of the contagion we’re seeing, but it is a rescue operation.”
Other analysts have stressed that the extent of the contagion is not yet known, and it will take time to see whether the Fed’s response was appropriate.
“Over the past five days, the US banking system has shown signs of cracking with the collapse of Silicon Valley Bank … The extent of the fallout is not yet fully known,” Connor Combs of Combs Capital Partners wrote in a note to investors on Monday. .
“On Tuesday of last week, Jerome Powell, the Fed chairman, testified before Congress. He was asked if he saw any systemic risk in the banking system, to which he replied: No. Then on Thursday we started to see the fallout from SVB,” he wrote.
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