Here’s Who’s Paying to Restore Silicon Valley, Signature Bank Deposits

The federal government stepped up 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 in venture capital and high-tech seed money stored in both banks. .

But unlike the 2008 financial crisis, when Congress passed new legislation to bail out the nation’s largest banks, the current bailout is smaller in scale, involving only two banks and no extra taxpayer money – yet.

To ensure depositors can still withdraw funds from their accounts — the vast majority of which have exceeded the $250,000 limit for standard Federal Deposit Insurance Corporation (FDIC) insurance — regulators say they draw from a special fund maintained by the FDIC called the Deposit Insurance Fund (DIF).

“For the two banks that went into receivership, the FDIC will use funds from the deposit insurance fund to ensure that all of its depositors are recovered,” a Treasury official told reporters Sunday evening. “In this case, the funded deposit insurance bears the risk. These are not taxpayer funds.

Where does the money come from

DIF’s money comes from insurance premiums that banks are required to pay to it as well as interest earned on funds invested in US bonds and other securities and bonds.

This is why some observers have said that the term “bailout” should not be used in reference to the current government intervention – because it is bank money plus interest that is used to insure depositors, and it is administered only by the federal government.

But behind the DIF is “the full faith and credit of the United States government,” according to the FDIC, which means that if the DIF runs out of money or runs into a problem, the Treasury could appeal to taxpayers as next. appeal.

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

The Fed steps in for the backup

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

“Both of these measures are likely to boost depositor confidence, even if they end before an FDIC guarantee of uninsured accounts, as was put in place in 2008,” Goldman Sachs analysts wrote in a note. to investors on Sunday.

“The Dodd-Frank Act limits the FDIC’s power to issue safeguards by requiring Congress to pass a joint resolution of approval, which is only marginally easier than passing a new legislation. Given the actions announced today, we do not expect short-term actions in Congress to offer guarantees,” they wrote.

Despite the fact that no new legislation has been introduced in response to the current bank failures, many analysts are pointing to how taxpayers’ money has 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-leaning think tank, said in an email to The Hill.

“It puts taxpayers’ money at risk (we might not pay anything) for a group of people, big depositors, who have no right to it. I think it was the right thing to do, given the reality of the contagion we’re seeing, but it’s a bailout.

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

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

“Tuesday of last week, Jerome Powell, the chairman of the Fed, testified before Congress. He was asked if he saw any systemic risk within the banking system, to which he replied “No”. Then on Thursday we started to see the fallout from the SVB,” he wrote.