When is a bailout not a bailout? It’s a question many people are asking after the dramatic collapse of Silicon Valley Bank and the US’s decision to rescue depositors on Sunday.
Joe Biden and elected and appointed officials all insist the emergency interventions to protect deposits in Silicon Valley Bank and Signature Bank, a second bank that failed on the weekend – or, indeed, any further bank failures – won’t come at taxpayers’ expense.
On Monday, Biden was at pains to say that “no losses” would be borne by taxpayers, and the money would come from the fees that banks pay into the deposit insurance fund of the Federal Deposit Insurance Corporation (FDIC).
His comments followed those of Janet Yellen, the treasury secretary, who told CBS on Sunday: “Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out, and the reforms that have been put in place means that we’re not going to do that again.”
Jason Furman, chair of the Council of Economic Advisers under Barack Obama, was not convinced. “Regulators probably needed to do what they did to prevent potentially chaotic damage across the economy,” Furman, now a professor at Harvard, said in a tweet. “But make no mistake – it does have an expected cost to taxpayers.”
Even Andrew Ross Sorkin, financial columnist for the New York Times and author of Too Big to Fail, the bestselling book about the 2008 financial crisis, thinks it’s a bailout. “It is a bailout. Not like 2008. But it is a bailout of the venture capital community + their portfolio companies (their investments). That’s the depositor base of SVB. It is the right thing to do in the moment, but there will be ramifications + new regs. VC’s should say thank you,” he wrote on Twitter.
It is easy to see why the Biden administration is keen to avoid “the B-word” given the general antipathy towards the enormous bailouts that Wall Street banks received during the 2008 financial crisis.
And to be fair there are some differences. Finance officials have said that covering depositor losses from the bank failures would be met, in part, by the deposit insurance fund held by the FDIC – the government corporation that supplies deposit insurance to depositors in US commercial banks and savings banks.
Unlike in 2008, shareholders and bondholders in the banks will not be compensated. “They knowingly took a risk and when the risk didn’t pay off, investors lose their money. That’s how capitalism works,” Biden said Monday.
Pres. Biden says those who invested in failed Silicon Valley Bank and Signature Bank will not be protected: “They knowingly took a risk and when the risk didn’t pay off, investors lose their money. That’s how capitalism works.” https://t.co/HWi82gAbJP pic.twitter.com/3hVKFJqmZt
— ABC News (@ABC) March 13, 2023
But someone has to pay. US banks, particularly regional banks, are believed to be sitting on $620bn in losses from moves in treasury bond prices where they placed customer funds during the decade when the US central banks held interest rates at effectively zero.
At the end of 2022, the FDIC reported that its deposit insurance fund had a balance of $128bn, or about 1.27% of the total insured deposits, and far less than may be needed. The deposit insurance fund is ultimately a banking cost passed on to customers in the form of banking fees.
Funding for the non-bailout bailout will also come from selling off SVB and Signature assets, pegged at $212bn and $110bn respectively. Thus, the theory goes, taxpayers will not be directly affected by the turmoil in the banking sector..
After Biden spoke on Monday offering reassurance that the banking system is not at risk, the markets remained unimpressed. Investor funds flowed into safe harbor US treasuries and out of smaller banking stocks, suggesting other banks could be at risk.
“Joe Biden’s words of reassurance did little to calm markets as worries raced around that other smaller US banks could become the latest dominos to fall,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.
“The wider banking system will bear the brunt of the bailout of banking customers, as the money will come from fees institutions pay into the deposit insurance fund,” Streeter said, but she predicted that the US Treasury “will move swiftly to fully guarantee further deposits if more banks turn insolvent”.
If that happens, it will get harder to argue that the non-bailout bailout will not ultimately fall on US taxpayers.
Assuming there are wider losses not covered either by SVB and Signature assets or federal deposit insurance funds, “part of it should be expected to fall on bank customers indirectly”, Morgan Ricks, a banking professor at Vanderbilt Law School, told NBC. But these are uncertain times and he added that it’s also “entirely possible it will cost zero”.
