Mar 13, 2023 - Economy

Let the bailout debate begin

Illustration of a caution sign on an inner tube floating on the water.

Illustration: Lindsey Bailey/Axios

For roughly 77 hours, between noon ET on Friday and 6pm on Sunday, a chorus of Silicon Valley bigwigs and elected leaders called vocally for uninsured depositors of Silicon Valley Bank to be made whole — to be bailed out by the federal government. In the end, they got what they wanted.

Why it matters: The Biden administration is pushing back hard on the idea that this was a bailout. "No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer," says the official statement from Treasury, the Fed, and the Federal Deposit Insurance Corporation. Many won't be convinced.

How it works: When a bank fails, depositors are made whole by the FDIC insurance fund. The insurance only covers deposits up to $250,000, although there are plenty of workarounds that allow depositors to effectively buy much more FDIC insurance than that.

  • In the cases of SVB and Signature Bank, FDIC insurance will now cover all depositors, regardless of size. The FDIC insurance fund — which is funded by a levy on bank deposits — stands at roughly $125 billion.
  • It's worth noting this is nothing radical or new. Uninsured depositors have been paid out in full in every bank failure in living memory, with just one exception — IndyMac, in 2008.

Between the lines: In the absence of Sunday's announcements, the insurance fund would have been pressed into heavy duty by the onset of an inevitable banking crisis.

  • Conversely, in the presence of the announcement, there's no need for anybody to move their money at all, and the pressure on the fund could be tiny.
  • In other words: While this is undoubtedly a bailout of depositors at SVB and Signature, its cost could, weirdly, be negative.

What they're saying: "The deposit insurance fund is bearing the risk," a senior administration official told reporters on Sunday. "This is not funds from the taxpayer."

  • What they're not saying: Most taxpayers are also bank depositors, and some portion of their bank deposits is used to fund the FDIC, in what feels much like an involuntary tax being levied by a government agency.

The bottom line: If a bailout doesn't cost anything, is it really a bailout?

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