Will Americans end up footing the bill for bank failures?

WASHINGTON — The government’s response to the failure of two major 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 be?

It could be months before the answers are fully known. The Biden administration said it would guarantee uninsured deposits at both banks. The Federal Reserve has announced a new lending 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 the response: It said banks had borrowed about $300 billion in emergency funding last week, with nearly half going to holding companies to pay depositors to the two banks. 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 widening panic in which customers rush to withdraw so much money that even healthy banks go under. This scenario would upset the entire financial system and risk derailing the economy.

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

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

How is the answer paid?

Most of the cost of guaranteeing all deposits at both banks will likely be covered by the proceeds received by the Federal Deposit Insurance Corp. by 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 by the FDIC’s deposit insurance fund, which is typically used when a bank is unable to reimburse depositors of up to $250,000 per account. The fund is maintained by fees paid by participating banks.

Both Silicon Valley and Signature banks had an impressively high share of deposits above that amount: 94% of Silicon Valley’s deposits were uninsured, as were 90% of Signature’s deposits. The average for the big banks is about half that level.

If needed, the insurance fund will be replenished with a “special assessment” for banks, the FDIC, Fed and Treasury said in a joint statement. While the cost of that assessment could ultimately be passed on to the bank’s customers, it’s unclear how much money that would involve.

Kathryn Judge, a law professor at Columbia University, said greater costs to consumers and the economy could come from potentially significant changes in the financial system resulting from this episode.

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

“It will require us to review the entire regulatory framework of the bank,” Judge said. “This is far more significant than the modest cost that other banks will pay.”

Will taxpayers be on the hook?

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

“No damages related to the resolution of Silicon Valley Bank will be borne by the taxpayer,” the Treasury, Fed and FDIC joint statement said.

Treasury Secretary Janet Yellen defended that view Thursday after tough questions from GOP lawmakers.

The Fed’s lending program to help banks pay depositors is backed by $25 billion in 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 Treasuries and other safe securities as collateral.

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

“To say the taxpayer will pay nothing ignores the fact that providing insurance to someone who didn’t pay for insurance is a gift,” said Anil Kashyap, an economics professor at the University of Chicago. “And that’s how it happened.”

So is this a rescue?

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

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

Biden stressed that bank managers would be fired and their investors would not be protected. Both banks will cease to exist. In the 2008 crisis, some financial institutions that received government bailouts, such as the insurance company AIG, were saved from almost certain bankruptcy.

But many economists say depositors at Silicon Valley Bank, which included wealthy venture capitalists and tech startups, are still getting government bailouts.

“Why does capitalism make sense for someone to take a risk and then protect themselves from that risk when that risk actually happens?” asked Raghuram Rajan, an economics professor at the University of Chicago and former head of India’s central bank. “It’s probably good in the short term in the sense that you don’t have a widespread panic. But it’s problematic for the system in the long run.”

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

Banks in rural Oklahoma “are going to pay a special fee so they can bail out the millionaires in San Francisco,” Sen. James Lankford, R-Oklahoma, said on the Senate floor.


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

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