Are Taxpayers on the Hook for SVB and Signature Bank Deposits?
That prompted questions about whether the government support amounts to a bailout and whether taxpayer funds are at risk. Here is a look at some of those questions.
What did the regulators do?
The Treasury, Federal Reserve and Federal Deposit Insurance Corp. in a joint statement Sunday declared SVB and Signature “systemic risks” to the financial system, a formal designation that gave regulators more flexibility when dealing with the banks.
The statement said that all depositors in those banks would have access to their money on Monday, regardless of the size of their accounts. Ordinarily, the FDIC insures accounts with up to $250,000 per customer, while those with larger deposits assume the risk if the bank goes out of business.
Separately, the Fed said it had created a new lending vehicle—the Bank Term Funding Program—to help other troubled banks meet any customer withdrawals. Banks can take one-year loans from the Fed, with assets such as Treasurys or mortgage-backed securities as collateral, priced at face value.
The Treasury will provide $25 billion to cover any losses incurred by the Fed’s lending.
Together, the moves are designed to reassure bank customers that their deposits, no matter how large, will be safe and to prevent more institutions from suffering runs.
Is this a bailout?
That depends on whom you ask. Administration officials said this wasn’t a bailout because stock and bondholders in the banks wouldn’t be protected. Both SVB and Signature have seen their stock prices collapse. Regional lenders suffered their worst selloff in three years before rebounding Tuesday.
Senior management at both banks will also lose their jobs, the agencies’ statement said.
But
Peter Conti-Brown,
a professor at the Wharton School at the University of Pennsylvania, said the moves amount to a bailout of uninsured depositors at the two failed banks, benefiting people and businesses who kept more than $250,000 in a bank account.
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What other questions do you have about the SVB and Signature Bank collapses? Join the conversation below.
“The uninsured depositors of Silicon Valley Bank are not entitled to this extraordinary government benefit, and they received it anyway,” Mr. Conti-Brown said. Meanwhile, bank customers who took steps to ensure they didn’t have more than $250,000 sitting in any one account did so unnecessarily, he added.
Are taxpayers on the hook?
Uninsured deposits at SVB and Signature Bank will be covered by the FDIC’s deposit insurance fund, and the Fed will provide the loans to other banks.
“No losses will be borne by the taxpayer,” said the statement from the Treasury and the bank regulators.
They said the FDIC will make up for any losses to its deposit insurance fund with a special assessment on banks.
Ultimately, those costs will likely be passed on to bank customers, said
Aaron Klein,
senior fellow at the Brookings Institution. That could be through higher overdraft fees, lower interest rates on deposits or other ways that banks make money from their customers.
“Main Street banks in America and their customers are bailing out the tech firms and cryptocurrency giants who had uninsured deposits at Silicon Valley Bank,” he said.
In addition, by offering $25 billion as a backstop to the Fed’s lending program, the Treasury Department is committing public funds if banks don’t repay their loans, Mr. Conti-Brown said.
“The Treasury has put itself in a first-loss position with money appropriated by the Congress,” he said. “That’s taxpayer money.”
The Fed said Sunday that the central bank “did not anticipate that it will be necessary to draw on these backstop funds.”
If the Fed did use that money, it isn’t clear what the final cost to taxpayers would be. A 2008 program that provided $700 billion in public funding to help stabilize the financial system, for instance, ended up costing the government much less: around $31 billion after banks repaid their loans and the government sold off the assets it had acquired, according to the Congressional Budget Office.
The FDIC’s deposit insurance fund will cover uninsured deposits at SVB and Signature Bank.
Photo:
Elizabeth Frantz for The Wall Street Journal
Will this make the banking sector riskier?
The administration says it won’t. On Monday, President Biden said the risks had been contained. “Americans can have confidence that the banking system is safe,” he said.
But if the experience at SVB and Signature convinces depositors at other banks that regulators will guarantee their money is safe, some bank customers could start to keep larger deposits, which would be more vulnerable in times of crisis.
More broadly, the government action sends the message that any bank failure, no matter whether it is a large or small bank, poses a systemic risk to the financial system, said Mr. Conti-Brown. That could give banks an incentive to take bigger risks, assuming that regulators will come to the rescue.
“Do we want to live in a world where failure is not an option for any bank anywhere?” he said.
Write to David Harrison at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
That prompted questions about whether the government support amounts to a bailout and whether taxpayer funds are at risk. Here is a look at some of those questions.
What did the regulators do?
The Treasury, Federal Reserve and Federal Deposit Insurance Corp. in a joint statement Sunday declared SVB and Signature “systemic risks” to the financial system, a formal designation that gave regulators more flexibility when dealing with the banks.
The statement said that all depositors in those banks would have access to their money on Monday, regardless of the size of their accounts. Ordinarily, the FDIC insures accounts with up to $250,000 per customer, while those with larger deposits assume the risk if the bank goes out of business.
Separately, the Fed said it had created a new lending vehicle—the Bank Term Funding Program—to help other troubled banks meet any customer withdrawals. Banks can take one-year loans from the Fed, with assets such as Treasurys or mortgage-backed securities as collateral, priced at face value.
The Treasury will provide $25 billion to cover any losses incurred by the Fed’s lending.
Together, the moves are designed to reassure bank customers that their deposits, no matter how large, will be safe and to prevent more institutions from suffering runs.
Is this a bailout?
That depends on whom you ask. Administration officials said this wasn’t a bailout because stock and bondholders in the banks wouldn’t be protected. Both SVB and Signature have seen their stock prices collapse. Regional lenders suffered their worst selloff in three years before rebounding Tuesday.
Senior management at both banks will also lose their jobs, the agencies’ statement said.
But
Peter Conti-Brown,
a professor at the Wharton School at the University of Pennsylvania, said the moves amount to a bailout of uninsured depositors at the two failed banks, benefiting people and businesses who kept more than $250,000 in a bank account.
SHARE YOUR THOUGHTS
What other questions do you have about the SVB and Signature Bank collapses? Join the conversation below.
“The uninsured depositors of Silicon Valley Bank are not entitled to this extraordinary government benefit, and they received it anyway,” Mr. Conti-Brown said. Meanwhile, bank customers who took steps to ensure they didn’t have more than $250,000 sitting in any one account did so unnecessarily, he added.
Are taxpayers on the hook?
Uninsured deposits at SVB and Signature Bank will be covered by the FDIC’s deposit insurance fund, and the Fed will provide the loans to other banks.
“No losses will be borne by the taxpayer,” said the statement from the Treasury and the bank regulators.
They said the FDIC will make up for any losses to its deposit insurance fund with a special assessment on banks.
Ultimately, those costs will likely be passed on to bank customers, said
Aaron Klein,
senior fellow at the Brookings Institution. That could be through higher overdraft fees, lower interest rates on deposits or other ways that banks make money from their customers.
“Main Street banks in America and their customers are bailing out the tech firms and cryptocurrency giants who had uninsured deposits at Silicon Valley Bank,” he said.
In addition, by offering $25 billion as a backstop to the Fed’s lending program, the Treasury Department is committing public funds if banks don’t repay their loans, Mr. Conti-Brown said.
“The Treasury has put itself in a first-loss position with money appropriated by the Congress,” he said. “That’s taxpayer money.”
The Fed said Sunday that the central bank “did not anticipate that it will be necessary to draw on these backstop funds.”
If the Fed did use that money, it isn’t clear what the final cost to taxpayers would be. A 2008 program that provided $700 billion in public funding to help stabilize the financial system, for instance, ended up costing the government much less: around $31 billion after banks repaid their loans and the government sold off the assets it had acquired, according to the Congressional Budget Office.
The FDIC’s deposit insurance fund will cover uninsured deposits at SVB and Signature Bank.
Photo:
Elizabeth Frantz for The Wall Street Journal
Will this make the banking sector riskier?
The administration says it won’t. On Monday, President Biden said the risks had been contained. “Americans can have confidence that the banking system is safe,” he said.
But if the experience at SVB and Signature convinces depositors at other banks that regulators will guarantee their money is safe, some bank customers could start to keep larger deposits, which would be more vulnerable in times of crisis.
More broadly, the government action sends the message that any bank failure, no matter whether it is a large or small bank, poses a systemic risk to the financial system, said Mr. Conti-Brown. That could give banks an incentive to take bigger risks, assuming that regulators will come to the rescue.
“Do we want to live in a world where failure is not an option for any bank anywhere?” he said.
Write to David Harrison at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
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