Will Americans end up footing the bill for ‘collapsed’ banks?

WASHINGTON, March 19, (AP): The government’s response to the failure of two large banks has already involved hundreds of billions of dollars. So will ordinary Americans end up paying for it, one way or another? And what will the price tag be?

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

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

The goal is to prevent a broadening panic in which customers rush to pull out so much money that even healthy banks buckle. That scenario would unsettle the entire financial system and risk derailing the economy.

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

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

How is the response being paid for?

Most of the cost of guaranteeing all deposits at both banks will likely be covered by the proceeds the Federal Deposit Insurance Corp. receives from winding down the two banks - either by selling them to other financial institutions or by auctioning off their assets.

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

Both Silicon Valley and Signature banks had a strikingly high share of deposits above that amount: 94% of Silicon Valley’s deposits were uninsured, as were 90% of deposits at Signature. 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. Though the cost of that assessment could ultimately be borne by bank customers, it’s not clear how much money would be involved.

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

If all customer deposits were considered guaranteed by the government, formally or informally, then regulations would need to be strengthened to prevent bank failures or lessen their costs when they do happen. Banks might have to pay permanently higher fees to the FDIC.

“It’s going to require us to revisit the entire bank regulatory framework,” Judge said. “That’s far more significant than the modest costs that other banks will pay.”

Will taxpayers be on the hook? 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 way similar to the highly unpopular bailouts of the biggest financial firms during the 2008 financial crisis.