news agency
Will taxpayers pay for US bank failures?

Will taxpayers pay for US bank failures?

The government’s response to the failure of two large banks has already involved hundreds of billions of dollars. Dollars. Will taxpayers end up paying for it, one way or another? And what will be the price?

It could be months before we know the answers. President Joe Biden’s government has said it will guarantee uninsured deposits at both banks. The Federal Reserve announced a new loan program for all banks that need to borrow money to pay for withdrawals.

On Thursday, the Fed offered the first glimpse of the scale of the response by revealing that banks had borrowed about $300 billion in emergency funds last week and nearly half of that amount went to holding firms to the two troubled banks pay depositors. The Fed did not say how many other banks borrowed money, adding that it expects the loans to be repaid.

The aim is to prevent the panic from spreading and to prevent depositors from seeking to quickly withdraw so much money that even healthy banks are swept away in a bank stampede. Such a scenario would destabilize the entire financial system and risk derailing the economy.

Taxpayers may not bear any direct costs from 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 the higher costs on to their customers, ultimately forcing everyone to pay more for services.

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

HOW IS THE RESPONSE PAID?

Most of the cost of insuring all the deposits at both banks will likely be covered by the proceeds the US Federal Deposit Insurance Corporation (FDIC) receives from liquidating the two banks, either by selling them to other financial institutions or by auctioning off their assets.

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

Both the Silicon Valley and Signature banks had a surprisingly high ratio of deposits above that amount: 94% of Silicon Valley’s deposits were uninsured, as were 90% of Signature’s deposits. The average figure for the big banks is about half that level.

If necessary, the insurance fund will be replenished through a “special assessment” by the banks themselves, the FDIC, Fed and Treasury Department said in a joint statement. Although the cost of that assessment could ultimately be borne by the bank’s clients, it is unclear how much money will be involved.

Kathryn Judge, a Columbia University law professor, said a greater cost to consumers and the economy could arise from potentially major changes to the financial system resulting from this incident.

If all customer deposits were to be considered government guaranteed, formally or informally, it would be necessary to strengthen regulations to prevent future bank failures or reduce their costs when they do occur. Banks may have to pay higher fees to the FDIC on an ongoing basis.

“It will require us to review the entire banking regulatory framework,” Judge detailed. “That is much more significant than the modest costs that other banks will pay.”

WILL THE TAXPAYERS PAY IT?

Biden has insisted that taxpayer money will not be used to solve the crisis. The White House is desperate to avoid any perception that average Americans are “rescuing” to the two banks in a manner similar to the highly unpopular bailouts of the largest financial firms during the 2008 financial crisis.

“No loss related to the Silicon Valley Bank resolution will be borne by the taxpayer”read the joint statement from the Treasury, Fed and FDIC.

Treasury Secretary Janet Yellen defended that position Thursday under harsh questioning from Republican lawmakers.

The Fed’s loan program to help banks pay depositors is backed by $25 billion of taxpayer funds that will cover any loan losses, but the Fed says it’s unlikely the money will be required. , since the loans will be backed by Treasury bonds and other safe securities as collateral.

Even if taxpayers won’t pay the bailout outright, some economists say bank customers still have a chance to benefit from government support.

“To say that the taxpayer will not pay anything is to ignore the fact that providing insurance to someone who did not pay insurance is a gift”warns Anil Kashyap, professor of economics at the University of Chicago. “And something similar is what happened.”

SO COULD THIS BE CONSIDERED A RESCUE?

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

“It’s not a bailout like it happened in 2008,” Senator Richard Blumenthal, a Connecticut Democrat, reiterated this week as he proposed legislation to tighten bank regulation. “It is, in effect, a protection of depositors and a preventive measure to prevent it from spreading to other banks throughout the country.”

Biden has stressed that bank managers will be fired and that their investors will not be protected. Both banks will cease to exist. In the 2008 crisis, some financial institutions that received financial help from the government, such as the insurer AIG, were rescued from almost certain bankruptcy.

However, many economists point out that depositors of Silicon Valley Bankwhich included wealthy venture capitalists and tech startups, continue to receive government aid.

“Why is it responsible capitalism for someone to take a risk and then be protected from that risk when it actually takes place?” asked Raghuram Rajan, a finance professor at the University of Chicago and a former chief of India’s central bank. “That’s probably good in the short term in the sense that you don’t have a general panic … but it’s problematic for the system in the long term.”

Many Republicans on Capitol Hill argue that smaller community banks and their clients will absorb part of the cost.

Banks in rural Oklahoma “they are about to pay a special fee to be able to bail out millionaires in San Francisco”argued Senator James Lankford, Republican of Oklahoma, on the floor of the Senate.

Source: AP

Source: Gestion

You may also like

Hot News

TRENDING NEWS

Subscribe

follow us