Here’s who is paying to restore failed bank deposits

(The Hill) – The federal government mobilized immediately 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 of venture capital and high-tech start-up money stored in the two banks. 

But unlike the 2008 financial crisis, during which Congress passed new legislation in order to salvage the country’s largest banks, the current rescue plan is smaller in scale, pertains to only two banks, and isn’t additional taxpayer money — for now.

In order to make sure 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) — regulators say they’re pulling 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 of its depositors are made whole,” a Treasury official told reporters on Sunday night. “In that case the deposit insurance funded is bearing the risk. This is not funds from the taxpayer.”

Where the money comes from

The money in the DIF comes from insurance premiums that banks are required to pay into it as well as interest earned on funds invested in U.S. bonds and other securities and obligations. 

This is why some observers have been saying that the term “bailout” shouldn’t be used in reference to the current government intervention — because it’s bank money plus interest that’s being used to insure depositors, and it’s only being administered by the federal government.

But standing behind the DIF is the “the full faith and credit of the United States government,” according to the FDIC, meaning that if the DIF runs out of money or encounters a problem, the Treasury could call on taxpayers as a next resort.

This is not an impossibility. The DIF had a $125 billion balance as of the last quarter of 2022 and SVB reported $212 billion in assets in the same quarter. Treasury officials sounded confident on Sunday night the money in the DIF would be more than enough to cover SVB’s deposits.

The Fed steps in for backup

To settle fears of a potential shortfall, the Federal Reserve announced an additional line of credit known as a Bank Term Funding Program, offering loans of up to one year to banks, credit unions, and other types of depository institutions. For collateral, the Fed will take U.S. bonds and mortgage-backed securities, and the line of credit will be backed up by $25 billion from the Treasury’s $38 billion Exchange Stabilization Fund.

“Both of these steps are likely to increase confidence among depositors, though they stop short of an FDIC guarantee of uninsured accounts as 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 provide guarantees by requiring congressional passage of a joint resolution of approval, which is only marginally easier than passing a new legislation. Given the actions announced today, we do not expect near-term actions in Congress to provide guarantees,” they wrote.

Despite the fact that no new legislation has been introduced in response to the current bank failures, many analysts are calling attention to how taxpayer dollars have still been put at risk by the situation.

“I consider [this] a bailout,” economist Dean Baker of the Center for Economic Policy and Research, a left-learning think tank, told in an email The Hill.

“It puts taxpayer dollars at risk (we may not end up paying anything) for a group of people, large depositors, who have no claim to it. I think it was the right thing to do, given the reality of the contagion we are seeing, but it is a bailout.”

Other analysts have stressed that the extent of the contagion is not yet known and it will take time to see if the Fed’s response was fit to purpose.

“Over the last five days, the U.S. banking system has shown signs of cracking with the collapse of Silicon Valley Bank … The scope of the fallout is not entirely known yet,” Connor Combs of Combs Capital Partners wrote in a note to investors on Monday.

“On Tuesday of last week, Jerome Powell, the Fed Chair, testified in front of Congress. He was asked if he saw any systemic risk within the banking system, to which he replied, ‘No.’ Then on Thursday, we began to see the fallout from SVB,” he wrote.

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