Hundreds of billions of dollars have already been spent on government responses to the failures of two major banks. So will ordinary Americans end up paying for it somehow? And what about the price tag?
It can take months to fully know the answer. The Biden administration said it would insure uninsured deposits at both banks. The Federal Reserve has announced a new loan 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 its response: Banks borrowed about $300 billion in emergency funds over the past week, nearly half of which was sent to holding companies, and two failed banks gave depositors The Federal Reserve did not disclose how many other banks had borrowed the money, but added it expected the loans to be repaid.
The goal is to prevent panic from spreading as customers try to withdraw so much money that even healthy banks will buckle. That scenario risks disrupting the entire financial system and derailing the economy.
Taxpayers probably won’t bear the direct costs of the Silicon Valley and Signature bank failures. However, other banks may have to bear the cost of covering uninsured deposits. Over time, these banks could pass on higher costs to their customers, forcing everyone to pay more for their services.
Here are some questions and answers about the cost of bank failures.
where did the money come from?
Most of the costs of insuring all deposits at both banks may be covered by the proceeds from the closure of the two banks by the Federal Deposit Insurance Corporation, either through sales to other financial institutions or auctions of assets. there is.
Expenses in excess of that will be paid from the FDIC’s Deposit Insurance Fund. This deposit insurance fund is typically used when banks fail to refund depositors up to $250,000 per account. The fund is maintained at a fee paid by participating banks.
Both Silicon Valley and Signature banks had very high percentages of deposits above that amount, with 94% of Silicon Valley deposits uninsured, as was 90% of Signature deposits. The average for major banks is about half that.
The Federal Deposit Insurance Corporation, the agency responsible for ensuring the stability of the banking system, has its roots in the Great Depression.
The FDIC, Fed and Treasury Department said in a joint statement that the insurance fund will be replenished with “special assessments” of banks as needed. The cost of that assessment may ultimately be borne by the bank’s customers, though it’s not clear how much.
Columbia University law professor Kathryn Judge said the greater cost to consumers and the economy could result in potentially major changes to the financial system from the event.
If all customer deposits are considered to be formally or informally guaranteed by the government, then regulation will need to be tightened to prevent bank failures or to reduce costs in the event of bank failure. Banks may have to pay permanent high fees to the FDIC.
“The whole banking regulatory framework will need to be reviewed,” Judge said.
Are taxpayers on the hook?
President Joe Biden insists he will not use taxpayer money to solve the crisis. The White House says he’s “bailing out” two banks in a manner similar to how the average American bailed out big financial companies so unpopularly during the 2008 financial crisis. I try to avoid the perception that
“Any losses related to the Silicon Valley Bank resolution will not be borne by taxpayers,” read a joint statement from the Treasury Department, Fed and FDIC.
Treasury Secretary Janet Yellen defended her views Thursday after being challenged by Republican lawmakers.
The Fed’s lending program, which helps banks pay depositors, is backed by $25 billion of taxpayer money to cover loan losses. However, the Federal Reserve has said the funds are unlikely to be needed as the loans are backed by government bonds and other safe securities as collateral.
Even though taxpayers are not directly responsible, some economists say bank customers still stand to benefit from government support.
Anil Kashyap, an economics professor at the University of Chicago, said, “Taxpayers paying nothing ignores the fact that providing insurance to those who do not pay premiums is a gift. “And that’s kind of what happened.”
Was this a bailout?
Biden and other Democrats in Washington deny their actions will help any kind.
“This is not a bailout like what happened in 2008,” Sen. Richard Blumenthal, a Democratic Rep. from Connecticut, said this week while proposing a bill to tighten banking regulation. “This is effectively a depositor protection and a precautionary measure to deter crackdowns on other banks across the country.”
Mr. Biden stressed that bank management would be fired and investors would be unprotected. The 2008 crisis saved some government-financed financial institutions, such as insurance company AIG, from near-certain bankruptcy.
But many economists say Silicon Valley bank depositors, including wealthy venture capitalists and tech startups, are backed by the government.
“Why is capitalism sensible when someone takes a risk and is protected from that risk when it actually happens?” Raghuram Rajan, Professor of Finance at the University of Chicago and former Governor of the Central Bank of India asked Mr. “It’s probably good in the short term in the sense that panic doesn’t spread. …but it’s bad for the system in the long run.”
Many Republicans in the Capitol argue that smaller community banks and their customers will cover some of the costs.
Oklahoma’s local banks are “trying to pay a special fee so they can bail out a San Francisco billionaire,” Oklahoma Republican Senator James Lankford said on the Senate floor. rice field.
Associated Press writer Fatima Hussain and video journalist Rick Gentilo contributed to this report.