The federal government responded immediately to the collapses 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 seed capital stored in the two banks.
But unlike the 2008 financial crisis, when Congress passed new legislation to bail out the country’s largest banks, the current bailout plan is smaller, affects just two banks, and isn’t extra taxpayer money — for now.
To ensure depositors can continue to withdraw funds from their accounts — the vast majority of which have exceeded the $250,000 limit for standard Federal Deposit Insurance Corporation (FDIC) insurance — regulators say they’re funded from a special fund managed by the FDIC called deposit insurance fund (DIF).
“For the two banks that have been placed under receivership, the FDIC will use funds from the Deposit Insurance Fund to ensure all of its depositors recover,” a Treasury Department official told reporters Sunday night. “In this case, the funded deposit insurance bears the risk. This is not taxpayer money.”
where the money comes from
The money in the DIF comes from insurance premiums that banks are required to pay and interest income from money invested in US bonds and other securities and obligations.
For this reason, some observers say the term “bailout” should not be used in reference to the current government intervention — because it’s bank money plus interest used to insure depositors, and it’s managed only by the federal government.
However, behind the DIF, according to the FDIC, is “the full confidence and endorsement of the United States government,” meaning that if the DIF runs out of money or has a problem, the Treasury Department could call on taxpayers as the next resort.
This is not an impossibility. The DIF had $125 billion in assets as of the last quarter of 2022 and the SVB reported $212 billion in assets for the same quarter. Treasury officials sounded confident Sunday night that money in the DIF would be more than enough to cover SVB deposits.
The Fed steps in for support
To allay fears of a potential deficit, the Federal Reserve announced an additional line of credit known as the Bank Term Funding Program, offering loans for up to a year to banks, credit unions and other types of custodians. The Fed is taking US bonds and mortgage-backed securities as collateral, and the line of credit is backed by $25 billion from the Treasury Department’s $38 billion FX Stabilization Fund.
“Both of these moves are likely to boost depositor confidence, although they shy away from an FDIC guarantee for uninsured accounts like the one introduced in 2008,” analysts at Goldman Sachs wrote in a Sunday note to investors.
“The Dodd-Frank Act limits the FDIC’s authority to make guarantees by requiring Congress to pass a joint act of assent, which is only marginally easier than passing new legislation. Given the actions announced today, we do not expect short-term action in Congress to offer guarantees,” they wrote.
Despite the fact that no new legislation has been introduced in response to the recent bank failures, many analysts point to how taxpayers’ money is still at risk from the situation.
“I look at [this] a bailout,” said economist Dean Baker of the Center for Economic Policy and Research, a leftist think tank, in an email to The Hill.
“It’s putting taxpayers’ money at risk (we might end up paying nothing) for a group of people, big depositors, who aren’t entitled to it. I think it was the right thing to do given the reality of the contagion we’re seeing, but it’s a bailout.”
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Other analysts have stressed that the extent of the contagion is not yet known and it will take time to determine whether the Fed’s response was fit for purpose.
“Over the past five days, the U.S. banking system has shown signs of collapse with the collapse of Silicon Valley Bank… The magnitude of the fallout is not yet fully known,” Combs Capital Partners’ Connor Combs wrote in a note to investors on Monday.
“Last Tuesday, Jerome Powell, the Fed Chair, testified before Congress. When asked if he saw systemic risk in the banking system, he replied “no”. Then on Thursday we started watching SVB episodes,” he wrote.
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