Wall Street – not the taxpayer – will pay for the SVB and Signature deposit schemes


WASHINGTON — Plans announced Sunday to fully repay deposits made in the collapsed Silicon Valley Bank and closed Signature Bank will depend on Wall Street and major financial institutions — not taxpayers — to foot the bill, Treasury officials said.

“For the banks that have gone into receivership, the FDIC will use funds from the Deposit Insurance Fund to make sure all of its depositors are made healthy,” said a senior Treasury Department official, speaking to reporters about the plan on Sunday. condition of anonymity.

“The Deposit Insurance Fund bears the risk,” the official stressed. “This is not taxpayer money.”

The Deposit Insurance Fund is part of the FDIC and is funded by quarterly fees assessed on FDIC-insured financial institutions, as well as interest on funds invested in government bonds.

The DIF currently holds more than $100 billion, an amount that the Treasury official said was “more than entirely sufficient” to cover SVB and Signature depositors.

In addition to protecting these deposits, the Federal Reserve has announced a new Bank Term Funding Program aimed at protecting institutions vulnerable to the market instability created by the SVB’s failure.

The new Fed facility will offer loans of up to one year to banks, savings associations, credit unions and other institutions. Those benefiting from the facility will be asked to pledge high-quality collateral such as government bonds, government debt and mortgage-backed securities.

The BTFP will value these fixed-income assets at par, a boon to the banks that hold long-term assets with yields below current market rates. In a BTFP collateral arrangement, these bonds would be worth more than on the open market, where they would be sold at a loss.

The editors of The Wall Street Journal labeled the DIF and BFTP bailouts as two separate “bailouts” in an op-ed on Sunday.

But officials in the Biden administration strongly opposed the idea that the banking plans constituted a “bailout”.

“The holders of bank equity and bonds are being wiped out,” the Treasury official said. “They took a risk as owners of the securities. They will take the losses.”

“The companies are not bailed out … depositors are protected.”

The White House strategy is clearly based on the memory of the public anger sparked by the taxpayer-funded bailouts of major Wall Street banks during the 2008 financial crisis. The use of the DIF to support depositors is seen as a way to avoid repeating the same process.

President Joe Biden said tapping the DIF will ensure “taxpayer dollars are not at risk”.

As early as Sunday evening, there were signs that Biden’s plan to use the DIF on Capitol Hill was approved.

Senator Bernie Sanders, I-Vt., a fierce critic of the 2008 bank bailouts, said that if there were to be an SVB bailout “it would have to be 100 percent funded by Wall Street and major financial institutions,” which the DIF is.

Sanders blamed the collapse of the SVB on successful Republican efforts to relax banking regulations, which were signed into law by former President Donald Trump in 2018. Katie Porter, California’s Democratic Representative, said she was already writing legislation to overturn the Trump-era bill.

Even some Republicans expressed support for the federal measures taken to counter the effects of SVB and Signature.

“I have faith in our financial regulators” to make sure the banking system is stable, Rep. Patrick McHenry, NC, the Republican chairman of the House Financial Services Committee, said in a statement.

South Carolina GOP Senator Tim Scott, a potential 2024 Republican presidential nominee, said it was “important that we bring our markets to a calm and orderly resolution.”

But any hint of political detente was only temporary. Republicans and Democrats remained deeply divided over the issue of financial regulation, setting the stage for battles later this year over who was responsible for the collapse of the SVB and how to avoid another massive bank failure.

Sunday’s dramatic moves came just days after SVB, a major funding hub for technology companies, reported it was struggling, leading to a run on the bank’s deposits. Signing was closed by the government on Sunday.

The SVB’s bankruptcy was the largest collapse of a financial institution in the country since Washington Mutual collapsed in 2008.

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