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Will Americans end up footing the bill for bank failures? - Printable Version

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Will Americans end up footing the bill for bank failures? - Levin - 18-03-2023

By CHRISTOPHER RUGABER
an hour ago


HOW IS THE RESPONSE BEING PAID FOR?

Most of the cost of guaranteeing all deposits at both banks will likely be covered by the proceeds the Federal Deposit Insurance Corp. receives from winding down the two banks

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Any costs beyond that would be paid for out of the FDIC’s deposit insurance fund, which is typically used in the event of a bank failure to reimburse depositors for up to US$250,000 per account.

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Both Silicon Valley and Signature banks had a strikingly high share of deposits above that amount: 94% of Silicon Valley’s deposits were uninsured, as were 90% of deposits at Signature.

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If necessary, the insurance fund will be replenished by a “special assessment” on banks,

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it’s not clear how much money would be involved.

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

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WILL TAXPAYERS BE ON THE HOOK?

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

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The Fed’s lending program to help banks pay depositors is backed by US$25 billion of taxpayer funds that would cover any losses on the loans.

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

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

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SO IS THIS A BAILOUT?

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

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Biden has stressed that the banks’ managers will be fired and their investors will not be protected. Both banks will cease to exist.

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Yet many economists say the depositors at Silicon Valley Bank, which included wealthy venture capitalists and tech startups, are still receiving government help.

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


https://apnews.com/article/silicon-valley-banks-taxpayers-bailout-b562a3d4aefa4af7ecc09ac99258e9a0