Will Americans end up footing the bill for bank failures?

WASHINGTON — The government’s response to the failures of two major banks has already involved hundreds of billions of dollars. So will ordinary Americans end up paying for this, one way or another? And what will be the price?

It could be months before the answers are fully known. The Biden administration has said it will guarantee uninsured deposits at both banks. The Federal Reserve has announced a new loan program for all banks that need to borrow money to pay withdrawals.

On Thursday, the Fed gave a first glimpse of the scale of the response: It said banks had borrowed about $300 billion in emergency funding over the past week, nearly half of which was for loans. holding companies for the two failing banks to pay the depositors. The Fed did not say how many other banks have borrowed money and added that it expects the loans to be repaid.

The aim is to prevent a growing panic in which customers rush to withdraw so much money that even healthy banks give in. This scenario would disrupt the entire financial system and risk derailing the economy.

Taxpayers will likely bear no direct cost for the failure of Silicon Valley Bank and Signature Bank. But other banks may have to help cover the cost of covering uninsured deposits. Over time, these banks could pass higher costs onto customers, forcing everyone to pay more for services.

Here are some questions and answers about the cost of bank meltdowns:

HOW IS THE RESPONSE PAID?

Most of the cost of guaranteeing all deposits with the two banks will likely be covered by the product that the Federal Deposit Insurance Corp. receives from the liquidation of the two banks – either by selling them to other financial institutions or by auctioning their assets.

Any fees beyond that would be paid for by the FDIC’s deposit insurance fund, which is typically used in the event of bank failure to reimburse depositors up to $250,000 per account. The fund is maintained with fees paid by participating banks.

Silicon Valley and Signature banks had a surprisingly high share of deposits above this amount: 94% of Silicon Valley deposits were uninsured, as were 90% of Signature deposits. The average figure for large banks is about half that level.

If necessary, the insurance fund will be replenished by a “special assessment” on banks, the FDIC, Fed and Treasury said in a joint statement. Although the cost of this assessment may ultimately be borne by bank customers, it is unclear how much money would be involved.

Kathryn Judge, a law professor at Columbia University, said a higher cost to consumers and the economy could stem from potentially major changes to the financial system resulting from this episode.

If all customer deposits were considered government-backed, formally or informally, regulations would need to be tightened to prevent bank failures or reduce their costs when they occur. Banks may have to pay permanently higher fees to the FDIC.

“It’s going to force us to review the whole banking regulatory framework,” Judge said. “It’s far more important than the modest costs that other banks will pay.”

WILL TAXPAYERS BE BLOCKED?

President Joe Biden has insisted that no taxpayer money will be used to resolve the crisis. The White House is desperate to avoid any perception that average Americans are “bailing out” the two banks in a manner similar to the wildly unpopular bailouts of the biggest financial firms during the 2008 financial crisis.

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

Treasury Secretary Janet Yellen defended that view Thursday under tough questioning from GOP lawmakers.

The Fed’s lending program to help banks pay depositors is backed by $25 billion in public funds that would cover any losses on the loans. But the Fed says the money is unlikely to be needed because the loans will be backed by Treasuries and other safe securities as collateral.

Even if taxpayers are not directly responsible, some economists say bank customers will still benefit from government support.

“To say the taxpayer won’t pay anything ignores the fact that providing insurance to someone who hasn’t paid for insurance is a gift,” said University of Chicago economics professor Anil Kashyap. “And that’s kind of what happened. ”

IS THIS A RESCUE?

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

“This is not a bailout like it happened in 2008,” Sen. Richard Blumenthal, a Connecticut Democrat, said this week while proposing legislation to toughen banking regulations. “This is actually depositor protection and a preemptive measure to stop a run on other banks across the country.”

Biden stressed that bank executives will be fired and their investors will not be protected. Both banks will cease to exist. During the 2008 crisis, certain financial institutions which received financial aid from the State, such as the insurer AIG, were saved from almost certain bankruptcy.

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

“Why does capitalism make sense for someone to take a risk and then be protected against that risk when that risk is actually happening?” asked Raghuram Rajan, professor of finance 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 widespread panic. … But it’s problematic for the system in the long run.”

Many Capitol Hill Republicans argue that smaller community banks and their customers will bear some of the costs.

Banks in rural Oklahoma “are about to pay a special fee so they can bail out San Francisco millionaires,” Sen. James Lankford, a Republican from Oklahoma, told the Senate.

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Associated Press writer Fatima Hussein and video journalist Rick Gentilo contributed to this report.