Bank failures: Who pays state aid for Silicon Valley Bank and Signature Bank?

The federal government’s response to the failure of Silicon Valley and Signature banks has already drawn hundreds of billions of dollars, raising the question of who will end up paying for the aid.

It could be months before the answers are fully known.

The Biden administration said it will guarantee uninsured deposits at both banks, while the Federal Reserve announced a new lending program for all banks that need to borrow to pay for withdrawals. On Thursday, the Fed said banks had raised about $300 billion in emergency funding over the past week, with nearly half of that amount going to holding companies so the two failed banks could pay depositors. The Fed didn’t say how many other banks have borrowed money, adding that it expects to repay the loans.

While taxpayers are not bearing any direct costs for Silicon Valley and Signature’s failures today, other banks may need to help meet the cost of covering uninsured deposits. Over time, these 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 a bank failure:

How is the rescue paid for?

Federal regulators abruptly took over Silicon Valley Bank of California and Signature Bank of New York last week, sparking fear among both the companies’ investors and customers. The collapse of these banks sent panic shockwaves through the banking industry and inflicted pain on a handful of regional banks. President Biden and Treasury Secretary Janet Yellen have spent most of this week reassuring Americans that the US banking system is safe.

Most of the cost will likely be covered by proceeds collected by the Federal Deposit Insurance Corp. received from the settlement of the two banks. Any additional costs would be paid out of the FDIC’s deposit insurance fund.

If necessary, the insurance fund will be replenished through a “special assessment” of banks, the FDIC, the Fed and the Treasury Department said in a joint statement. Although the cost of this assessment could ultimately be borne by bank customers, it is not clear how much money it would be.

Are the taxpayers hooked?

President Biden has insisted that no taxpayers’ money will be used to solve the crisis. Treasury Secretary Janet Yellen defended that view under tough questioning by GOP lawmakers on Thursday.

Yellen testifies on Capitol Hill as bank stocks see slight recovery 05:51

The Fed’s lending program to help banks pay depositors is backed by $25 billion in taxpayer money, which would cover any losses on the loans. However, the Fed said the money is unlikely to be needed as the loans are backed by government bonds and other safe securities as collateral.

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

“To say that the taxpayer will not pay anything ignores the fact that providing insurance to someone who has not paid for insurance is a gift,” said University of Chicago economics professor Anil Kashyap. “And something like that happened.”

So is this a bailout?

Biden and other Democrats in Washington deny their actions amount to a bailout.

“It’s not a bailout like 2008,” Sen. Richard Blumenthal, a Connecticut Democrat, said this week as he proposed legislation to tighten banking regulations. “It is indeed a depositor protection and a pre-emptive 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 no longer exist. In the 2008 crisis, some financial institutions that received state aid, such as insurer AIG, were saved from certain bankruptcy.

However, many economists said Silicon Valley Bank’s depositors, which included wealthy venture capitalists and tech startups, are still receiving government aid.

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

Banks in rural Oklahoma “are about to pay a premium to bail out millionaires in San Francisco,” Senator James Lankford, an Oklahoma Republican, told the Senate.

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