Will Americans end up footing the bill for bank failures?

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WASHINGTON — 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 be the price of the label?

It could be months before the answers are fully known. The Biden administration said that he will guarantee uninsured deposits at both banks. The Federal Reserve announced 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 funds last week, with almost half of that going to holding companies. for the two failed banks to pay depositors. The Fed did not say how many other banks borrowed money, adding that it expects the loans to be repaid.

The goal is to prevent a widening panic in which customers rush to withdraw so much money that even healthy banks fold. Such a scenario would destabilize the entire financial system and risk derailing the economy.

Taxpayers likely won’t bear any direct costs from 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 bank collapses:


Most of the cost of insuring all deposits at both banks will likely be covered by the proceeds the Federal Deposit Insurance Corporation 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 out of the FDIC’s deposit insurance fund, which is typically used in the event the bank fails to reimburse depositors up to $250,000 per account. The fund is maintained with commissions paid by participating banks.

Both the Silicon Valley and Signature banks had a surprisingly high ratio of deposits above that amount: 94% of Silicon Valley deposits were uninsured, as were 90% of Signature deposits. The average figure for the big banks is about half that level.

If necessary, the insurance fund will be replenished through a “special assessment” of the banks, the FDIC, Fed and Treasury said in a joint statement. Although the cost of that assessment could ultimately be borne by the bank’s clients, it is unclear how much money would be involved.

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

If all customer deposits were to be considered government guaranteed, 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 review the entire banking regulatory framework,” Judge said. “That is much more significant than the modest costs that other banks will pay.”


President Joe Biden has insisted that no taxpayer money be used to solve the crisis. The White House is desperate to avoid any perception that average Americans are “bailing out” the two banks in a manner similar to the highly unpopular bailouts of the largest financial firms during the 2008 financial crisis.

“No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer,” the joint statement from the Treasury, the Fed and the FDIC read.

Treasury Secretary Janet Yellen defended that view Thursday under harsh questioning from Republican lawmakers.

The Fed’s loan program to help banks pay depositors is backed by $25 billion of taxpayer funds that would cover any loan losses. But the Fed says the money is unlikely to be needed because the loans will be backed by Treasury bonds and other safe securities as collateral.

Even if taxpayers aren’t squarely on the hook, some economists say bank customers still benefit from government support.

“Saying the taxpayer won’t pay anything ignores the fact that providing insurance to someone who didn’t pay insurance is a gift,” said Anil Kashyap, a University of Chicago economics professor. “And that’s kind of what happened.”


Biden and other Democrats in Washington deny that their actions amount to a bailout of any kind.

“It’s not a bailout like it was in 2008,” Sen. Richard Blumenthal, D-Conn., said this week as he proposed legislation to tighten bank regulation. “It is, in effect, a depositor protection and a preventative measure to stop a run on other banks across the country.”

Biden has stressed that bank 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 financial help from the government, such as the insurer AIG, were rescued from almost certain bankruptcy.

Yet many economists say Silicon Valley Bank’s depositors, which included wealthy venture capitalists and tech startups, still receive government aid.

“Why is it sensible capitalism for someone to take a risk and then hedge against that risk when that risk actually happens?” asked Raghuram Rajan, a finance professor at the University of Chicago and the former head of India’s central bank. “It’s probably good in the short term in the sense that you don’t have a general panic. … But it’s problematic for the system in the long run.”

Many Republicans on Capitol Hill argue that smaller community banks and their clients will pick up some of the cost.

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


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

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