WASHINGTON (AP) – The government’s response to the failure of two major banks has already involved hundreds of billions of dollars. So will ordinary Americans end up paying for it, one way or another? And what will the price tag be?
It may take 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 loan program for all banks that need to borrow money to pay for withdrawals.
On Thursday, the Fed gave the first glimpse of the scale of the response: It said banks had borrowed about $300 billion in emergency funding in the past week, with nearly half of that amount going to holding companies so the two failed banks could pay depositors. The Fed did not say how many other banks borrowed money, adding that it expects the loans to be repaid.
The aim is to prevent a wider panic in which customers rush to withdraw so much money that even healthy banks are straining. That scenario would unsettle the entire financial system and risk derailing the economy.
Taxpayers are unlikely to bear any direct costs for the failure of Silicon Valley Bank and Signature Bank. But other banks may have to help cover the costs of covering uninsured deposits. Over time, these banks could pass on higher costs to customers, forcing everyone to pay more for services.
Here are some questions and answers about the cost of bank failures:
How is the response paid for?
Most of the cost of guaranteeing all deposits at both banks will likely be covered by the proceeds that the Federal Deposit Insurance Corp. receives from liquidating the two banks – either by selling them to other financial institutions or by auctioning off their assets.
Any costs beyond that would be paid by the FDIC’s deposit insurance fund, which is typically used in the event of a bank’s failure to repay depositors for up to $250,000 per depositor. account. The fund is maintained with fees paid by participating banks.
Both Silicon Valley and Signature banks had a strikingly high proportion of deposits above this amount: 94% of Silicon Valley’s deposits were uninsured, as were 90% of deposits at Signature. The average figure for large banks is about half that level.
If necessary, the insurance fund will be replenished by 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 would be involved.
Kathryn Judge, a law professor at Columbia University, said a greater cost to consumers and the economy could stem from potentially major changes in the financial system resulting from this episode.
If all customer deposits were considered guaranteed by the government, formally or informally, regulations would need to be strengthened to prevent bank failures or reduce their costs when they occur. Banks may have to pay permanently higher fees to the FDIC.
“It’s going to require us to overhaul the entire banking law,” the judge said. “It is far more significant than the modest costs that other banks will pay.”
Will taxpayers be on the hook?
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 average Americans are “rescuing” the two banks in a way similar to the highly unpopular bailouts of major financial firms during the 2008 financial crisis.
“No losses associated with the dissolution of Silicon Valley Bank will be borne by taxpayers,” read the joint statement from the Treasury Department, the Fed and the FDIC.
Treasury Secretary Janet Yellen defended that view Thursday under tough questioning from GOP lawmakers.
The Fed’s lending program to help banks pay depositors is backed by $25 billion in taxpayer funds that would cover any losses on the loans. But the Fed says the money is unlikely to be needed because the loans will be backed by government bonds and other safe securities as collateral.
Even if taxpayers are not directly on the hook, some economists say the banks’ customers may still benefit from public support.
“To say that taxpayers will pay nothing ignores the fact that giving insurance to someone who hasn’t paid for the insurance is a gift,” said Anil Kashyap, an economics professor at the University of Chicago. “And that’s kind of what happened.”
So is this a bailout?
Biden and other Democrats in Washington deny that their actions constitute a bailout of any kind.
“It’s not a bailout like it happened in 2008,” Sen. Richard Blumenthal, a Democrat from Connecticut, said this week as he proposed legislation to tighten bank regulation. “It’s really depositor protection and a preventative measure to stop a race against other banks around the country.”
Biden has emphasized that the banks’ executives will be fired and their investors will not be protected. Both banks will cease to exist. In the 2008 crisis, some financial institutions that received state aid, such as the insurance company AIG, were saved from almost certain bankruptcy.
Still, many economists say Silicon Valley Bank’s depositors, which included wealthy venture capitalists and tech startups, are still receiving government bailouts.
“Why is it sensible capitalism for someone to take a risk and then be protected from that risk when that risk actually happens?” asked Raghuram Rajan, a finance professor at the University of Chicago and former governor of India’s central bank. “It’s probably good in the short term in the sense that you don’t have widespread panic. … But it is 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 costs.
Banks in rural Oklahoma “are paying a special fee to bail out millionaires in San Francisco,” Sen. James Lankford, an Oklahoma Republican, said on the Senate floor.
Associated Press writer Fatima Hussein and video journalist Rick Gentilo contributed to this report.