With the Federal Deposit Insurance Corporation (FDIC) promising that it would be covering Silicon Valley Bank’s (SVB) uninsured deposits, critics have levied accusations that this amounts to a bailout. President Joe Biden has repudiated this characterization, clarifying that the funds used to ensure SVB depositors don’t come from the taxpayer but from bank fees. While this statement is partially true, the reality is that asset sales take the brunt of these costs while the consumers take the rest.
For consumers with deposits under $250,000, this was always understood, and the FDIC has built a system for protecting their funds. The Depositor Insurance Fund (DIF) is an emergency reserve for moments like this. Most depositors have bank accounts insured this way. After bank failures, the fund gets replenished through fees imposed on banks. These fees, like taxes, are then passed down to the depositor.
Last weekend began with news that shocked the entire financial system when the FDIC announced its seizure of SVB. It became known that SVB had been incurring losses on mortgage-backed securities it bought back when interest rates were near zero. After the Fed’s unprecedented rate hikes, these securities dropped in value. Rumors of insolvency then caused a run on the bank, resulting in its seizure.
The FDIC insurance protocol soon kicked in, and all depositors could access their funds up to the insured cap of $250,000. The issue was that over 85 percent of SVB depositors had accounts exceeding this amount. Fears over uninsured deposits not receiving compensation created panic as pre-market stocks for small-to-medium-sized banks plummeted.
On Monday, after a turbulent weekend of speculation, Biden released a statement announcing that all depositors, even the uninsured, will be made whole. Additionally, the president claimed that this action would not incur any taxpayer liability.
Technically the president is correct. Unlike the Emergency Economic Stabilization Act of 2008, funding to ensure SVB depositors will not be drawn from the coffers of the Fed. Instead, the government will use a two-step approach to pay out all uninsured depositors. First, the FDIC will issue an advance payment on a percentage of a customer’s uninsured deposits and then give them a receivership certificate for the remainder. The remaining funds are allocated as dividend payments from sales of SVB assets.
An auction is currently underway for these assets, which, as of December, were worth $209 billion. The total amount of deposits in SBV before the collapse was $175 billion, of which roughly 88 percent were uninsured, meaning auctions will need to recuperate over $154 billion. Auctioned assets incur a discounted rate, which, according to a University of Georgia study, was around 12.4% below market price on average. Using these numbers, an estimated return on an auction would be $183 billion, enough to cover uninsured depositors.
There is a chance that auction discounts could be greater than expected, which could result in unfulfilled receivership obligations if funds are not extended from the DIF. Washington Post White House reporter Jeff Stein inquired about the DIF as a backstop for uninsured depositors when speaking to a representative of the US Treasury. Their response echoed similar remarks by the FDIC, which opens the door to using DIF funds to pay back uninsured deposits. Rep. Josh Gottheimer (R-NJ) released an endorsement of this idea, calling for the $250,000 cap on insured deposits to be temporarily lifted, entitling the $154 billion of uninsured deposits to the $128 billion in the DIF.
If the auction fails to cover uninsured deposits or the cap on insurable funds is lifted, the result will be the same: a depleted DIF. Though the Biden administration emphasizes that funding for the DIF comes from fees on banks, these fees ultimately get passed down to the bank depositors. Hopefully, auctions on SBV assets can make uninsured depositors whole without the FDIC resorting to an actual bailout. Unlike in 2008, this bailout would be funded by the consumer, not the taxpayer.
Isaac Schick is a policy analyst at the American Consumer Institute, a nonprofit educational and research organization. You can follow his work on Twitter @ConsumerPal.