Silicon Valley Bank and Signature Bank collapsed over the weekend in an uncanny echo of the 2008 financial crisis, and though many experts note the Treasury Department's plan to save depositors doesn't constitute a bailout because it draws from insurance funds paid by banks—and not taxpayer dollars—others worry the implications could ultimately fall to consumers through economic consequences like inflation.
Police officers leave Silicon Valley Bank headquarters in Santa Clara, California on Friday. (Photo . [+] by NOAH BERGER / AFP) (Photo by NOAH BERGER/AFP via Getty Images)
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All deposits in the now-defunct Silicon Valley and Signature Banks will be fully recouped without using taxpayer money, the Federal Deposit Insurance Corporation (FDIC) announced Sunday with the Department of Treasury and Federal Reserve (Fed).
Banks that are low on cash or holding too many securities like Treasury bonds, which have tanked in value following interest hikes from the Fed, can get year-long loans from the new Bank Term Funding Program, the Fed also announced Sunday.
The new loan program allows banks to temporarily exchange Treasury bonds and other securities with the Fed for their full value in cash, as opposed to their vastly diminished market value; the Fed will hold the securities as collateral and release them back to the bank after it pays back its loan.
President Biden and hedge fund investor Bill Ackman defended the measures Monday, saying that they protected the economy from further bank runs and credit freezes.
Biden, Ackman and Treasury Secretary Janet Yellen distanced the new policies from bank bailouts in the great financial crisis of 2008, where Ackman says taxpayer dollars were risked to save banks that made risky financial decisions.
According to Biden, the money will come from fees that banks pay into the Deposit Insurance Fund, and shareholders and unsecured debt holders won't be protected under the plan, thereby avoiding any burden on taxpayers from a potential bailout, notes EY chief economist Gregory Daco.
However, some critics are still skeptical taxpayers will get off the hook consequence-free, particularly if the Fed’s loans increase inflation.
Chief Critic
Peter Schiff, chief economist and global strategist at Euro Pacific Capital, argued in several tweets Monday that the expanded depositor insurance and bank loan fund are an ill-conceived bailout attempt that will still impact taxpayers. Schiff links to an article on his website explaining that, while Silicon Valley Bank is no longer operational, the government’s actions still constitute a bailout because the FDIC expanded deposit guarantees to types of deposits that aren’t usually ensured, like mutual funds, and banks are being given access to money they couldn’t get in the market. Though the Fed isn’t giving the banks cash directly, says Schiff, inflation will still rise when cash flows into the economy after banks trade in their devalued securities. Even if prices increase for only a year—the longest loan offered—taxpayers will pay the price.
Key Background
Silicon Valley Bank, the 16th largest bank in the nation by assets last week, was closed Friday after reporting a $1.8 billion dollar loss from the sale of devalued securities two days prior. Yellen, Biden and supporters like Ackman associate bailouts with charging taxpayers or decreased accountability for bank directors and managers who made poor investments. They argue the FDIC’s management of the situation doesn’t constitute a bailout because the banks were allowed to fail, senior management was fired and the depositor guarantee and bank loan fund won’t cost taxpayers any money. In traditional bank bailouts, like those in the financial crisis of 2008, failed banks are saved by FDIC and other financial institutions like the Fed and the Treasury. The FDIC, which usually insures checking and savings accounts up to $250,000, can increase the types of deposits they insure, while the FED and the Treasury Department usually help the failed banks get enough capital to guarantee their deposits. Bank bailouts from 2008 are often negatively associated with corporate greed because billions of dollars of taxpayer money were used to save banks some perceived to have invested unethically.
Big Number
$245 billion. That’s how much taxpayer money the Treasury Department, FDIC and Fed spent bailing out hundreds of banks that failed during the 2008 financial crisis. The institutions spent $200 billion investing in institutions like J.P. Morgan Chase, Goldman Sachs and Morgan Stanley. The FDIC guaranteed Citigroup and Bank of America’s debt and deposits from large corporate accounts to keep investors from leaving and companies from defaulting on paychecks.
Further Reading