The second-largest bank collapse in US history just occurred, again. The failure of First Republic Bank on May 1, downgraded the previous second-largest collapse of Silicon Valley Bank (SVB) to the third-largest. The Federal Deposit Insurance Corporation (FDIC) took control of First Republic and quickly sold the bank to JPMorgan Chase. Even with a loss-share transaction, the FDIC will cover an estimated $13 billion in losses. These losses will be paid out of the Deposit Insurance Fund (DIF), which will eventually need to be replenished by payments from banks, ironically creating additional financial strains that could result in further collapses.

Adding together the $13 billion in losses from First Republic, $20 billion assumed from SVB, and the $2.5 billion from Signature, the DIF will have taken on roughly $35.5 billion in losses in just the last two months. To meet the DIF reserve requirements specified by the Dodd-Frank Act, banks, many of which are already struggling to remain solvent, will need to pay more to the DIF than they currently are, potentially exacerbating the very issue the agency is trying to protect against.

The FDIC is responsible for protecting insured depositors and the banking sector broadly. The DIF acts as a reserve to pay depositors up to $250,000 on funds lost to bank failure. Funds that exceed this amount are theoretically not insured, though the FDIC usually covers these too.

The only real difference between insured and uninsured amounts is how the DIF replenishes losses. Losses on insured deposits are paid through regular premiums to the DIF by banks according to their level of risk (riskier banks require higher premiums) and need for funds. Uninsured deposits get paid through a sale of the failed bank’s assets, with the remaining balance being paid for by special assessments. These “assessments” are broadly defined and usually amount to larger banks footing the bill before the loss is added to the DIF balance sheet. The allocation of payments owed by banks is up to the discretion of the FDIC.

Either method falls back on the banking sector when banks are struggling to remain solvent, with unrealized losses on securities held by banks totaling $620.4 billion. Deposit insurance exists to assure consumers that their money is safe and prevent them from pulling out funds for fear their banks lack the capital to pay them out. Deposit insurance becomes depleted after major banking collapses, coinciding with a consumer confidence decline.

The FDIC openly acknowledges the procyclical nature of the DIF and has been working for over a decade to address it. A Center for Financial Research study conducted in conjunction with the FDIC, examined the effects of increasing DIF premiums, used to insure deposits, on bank lending rates. The study found that premiums negatively affected lending. Since interest on loans is a primary source of income for banks, a drop in overall lending can decrease the bank’s revenue. Additionally, special assessments have similar effects, as seen in 2009 when assessment payments cut JPMorgan’s earnings for the year by 10 cents a share. These lending and profit contractions can indicate poor health, potentially inducing a bank run by worried depositors.

In December 2022, the DIF had a balance of roughly $124.5 billion. After the recent bank failures, it incurred losses of $35.5 billion, amounting to almost 30 percent of its reserves. Whether through premiums or special assessments, the FDIC is required by law to replenish its reserves, putting additional stress on an already unstable banking sector.

The solutions to these problems are not easy, and people will lose no matter what federal agencies do. Though losing economic assets is painful, the state cannot pretend that supporting every failed bank comes cost-free. When bank collapses are socialized, someone needs to foot the bill.

Isaac Schick is a policy analyst at the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.