Will Americans end up footing the bill for bank failures?

Mar 17, 2023, 3:49 AM
A pedestrian carries an umbrella while walking past a Silicon Valley Bank Private branch in San Fra...
A pedestrian carries an umbrella while walking past a Silicon Valley Bank Private branch in San Francisco, Tuesday, March 14, 2023. (AP Photo/Jeff Chiu)
Credit: ASSOCIATED PRESS
(AP Photo/Jeff Chiu)

WASHINGTON (AP) — The government’s response to the failure of two large 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 could be months before the answers are fully known. The Biden administration said a new lending program for all banks that need to borrow money to pay for withdrawals.

On Thursday, the Fed provided 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 that amount going to holding companies for the two failed banks to pay depositors. The Fed did not say how many other banks borrowed money and added that it expects the loans to be repaid.

The goal is to prevent a broadening panic in which customers rush to pull out so much money that even healthy banks buckle. That scenario would unsettle the entire financial system and risk derailing the economy.

Taxpayers will probably bear no direct cost for the failure of Silicon Valley Bank and Signature Bank. But other banks may have to help defray the cost of covering uninsured deposits. Over time, those banks could pass higher costs on to customers, forcing everyone to pay more for services.

Here are some questions and answers about the cost of the bank collapses:

HOW IS THE RESPONSE BEING PAID FOR?

Most of the cost of guaranteeing all deposits at both banks will likely be covered by the proceeds the Federal Deposit Insurance Corp. receives from winding down the two banks — either by selling them to other financial institutions or by auctioning off their assets.

Any costs beyond that would be paid for out of the FDIC’s deposit insurance fund, which is typically used in the event of a bank failure to reimburse depositors for up to $250,000 per account. The fund is maintained with fees paid by participating banks.

Both Silicon Valley and Signature banks had a strikingly high share of deposits above that 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” on banks, the FDIC, Fed and Treasury said in a joint statement. Though the cost of that assessment could ultimately be borne by bank customers, it’s not clear how much money would be involved.

Kathryn Judge, a law professor at Columbia University, said a bigger cost to consumers and the economy could stem from potentially major changes to the financial system that result from this episode.

If all customer deposits were considered guaranteed by the government, formally or informally, then regulations would need to be strengthened to prevent bank failures or lessen their costs when they do happen. Banks might have to pay permanently higher fees to the FDIC.

“It’s going to require us to revisit the entire bank regulatory framework,” Judge said. “That’s 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 resolve the crisis. The White House is desperate to avoid any perception that average Americans are “bailing out” the two banks in a way similar to the highly unpopular bailouts of the biggest financial firms during the 2008 financial crisis.

“No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer,” read the joint statement from the Treasury, Fed and 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 of taxpayer funds that would cover any losses on the loans. But the Fed says it’s unlikely that the money will be needed because the loans will be backed by Treasury bonds and other safe securities as collateral.

Even if taxpayers aren’t directly on the hook, some economists say the banks’ customers still stand to benefit from government support.

“Saying that the taxpayer won’t pay anything ignores the fact that providing insurance to somebody who didn’t pay for 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 amount to a bailout of any kind.

“It’s not a bailout as happened in 2008,” Sen. Richard Blumenthal, a Democrat from Connecticut, said this week while proposing legislation to toughen bank regulation. “It is, in effect, protection of depositors and a preventive measure to stop a run on other banks all around the country.”

Biden has stressed that the banks’ managers 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 government financial aid, like the insurer AIG, were rescued from near-certain bankruptcy.

Yet many economists say the depositors at Silicon Valley Bank, which included wealthy venture capitalists and tech startups, are still receiving government help.

“Why is it sensible capitalism for somebody 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 head of India’s central bank. “It’s probably good for the short term in the sense that you don’t have a widespread panic. … But it is problematic for the system long term.”

Many Republicans on Capitol Hill argue that smaller community banks and their customers will shoulder some of the cost.

Banks in rural Oklahoma “are about to pay a special fee to be able to bail out millionaires in San Francisco,” Sen. James Lankford, a Republican from Oklahoma, said on the Senate floor.

___

Associated Press writer Fatima Hussein and video journalist Rick Gentilo contributed to this report.

United States News

LSU's Angel Reese (10) goes up to shoot over Miami's Kyla Oldacre (44) in the first half of an Elit...
Associated Press

Reese, LSU women push past Miami 54-42 to reach Final Four

GREENVILLE, S.C. (AP) — Angel Reese had 18 rebounds and LSU returned to the women’s Final Four for the first time in 15 years by beating Miami 54-42 on Sunday night, carrying a rapid rise under second-year coach Kim Mulkey straight to the sport’s biggest stage. Alexis Morris scored 21 points and Reese added 13 […]
20 hours ago
Associated Press

Twitter: Parts of its source code leaked online

NEW YORK (AP) — Some parts of Twitter’s source code — the fundamental computer code on which the social network runs — were leaked online, the social media company said in a legal filing on Sunday that was first reported by The New York Times. According to the legal document, filed with the U.S. District […]
20 hours ago
Miami forward Norchad Omier celebrates after their win against Texas in an Elite 8 college basketba...
Associated Press

Miller, Wong rally Miami past Texas 88-81 for 1st Final Four

KANSAS CITY, Mo. (AP) — On the eve of Miami playing for a place in its first Final Four, the quiet conversation floating through the team hotel did not revolve around all that the Hurricanes had accomplished this season. Instead, they talked about what had happened to bring last season to a close. The sting […]
20 hours ago
People worship on the steps of the Rolling Fork United Methodist Church, right, as damage is visibl...
Associated Press

Churches provide solace in tornado-ravaged Mississippi Delta

ROLLING FORK, Miss. (AP) — As a deadly tornado tore through the lower Mississippi Delta, the Rev. Mary Stewart clung to a door in the hallway of her Rolling Fork home, shielding herself from the branches and chunks of debris that came flying through her shattered windows. Friday’s storm flattened entire town blocks, but the […]
20 hours ago
TikTok CEO Shou Zi Chew testifies during a hearing of the House Energy and Commerce Committee, on t...
Associated Press

Gap enlarges between TikTok users, lawmakers on potential ban

A disconnect illustrates an uphill battle lawmakers face trying to convince the public that China could use TikTok as a weapon against Americans.
20 hours ago
San Diego State forward Aguek Arop (33) celebrates victory against Creighton in the second half of ...
Associated Press

San Diego State muscles past Creighton, makes 1st Final Four

LOUISVILLE, Ky. (AP) — Darrion Trammell converted a go-ahead free throw after he was fouled on a floater with 1.2 seconds left, and San Diego State muscled its way into its first Final Four, grinding out a 57-56 victory over Creighton on Sunday in the NCAA Tournament’s South Region final. Lamont Butler scored 18 points […]
20 hours ago

Sponsored Articles

(Pexels Photo)...

Sports gambling can be fun for adults, but it’s a dangerous game for children

While adults may find that sports gambling is a way to enhance the experience with more than just fandom on the line, it can be a dangerous proposition if children get involved in the activity.
...
Fiesta Bowl Foundation

Celebrate 50 years of Vrbo Fiesta Bowl Parade magic!

Since its first production in the early 1970s, the Vrbo Fiesta Bowl Parade presented by Lerner & Rowe has been a staple of Valley traditions, bringing family fun and excitement to downtown Phoenix.
(Photo via MLB's Arizona Fall League / Twitter)...
Arizona Fall League

Top prospects to watch at this year’s Arizona Fall League

One of the most exciting elements of the MLB offseason is the Arizona Fall League, which began its 30th season Monday.
Will Americans end up footing the bill for bank failures?