SVB And Signature Deposit Relief Plans Will Be Paid For By Wall Street, Not Taxpayers

The Treasury Department suggested Sunday that, in order to fully reimburse deposits made in the failed Silicon Valley Bank and the shuttered Signature Bank, Wall Street, and large financial institutions would be responsible for paying the bill, not taxpayers.

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“The Federal Deposit Insurance Corporation (FDIC) will make use of funds from the Deposit Insurance Fund in order to ensure that all of the depositors of the banks that were placed into receivership will be made whole,” said a senior Treasury official who spoke to reporters about the plan on Sunday on condition of anonymity.

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According to the official, the Deposit Insurance Fund is bearing the risk. "These are not taxpayer funds."

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The Deposit Insurance Fund is a component of the Federal Deposit Insurance Corporation (FDIC) that is funded through quarterly fees assessed on FDIC-insured financial institutions and interest earned on funds invested in government bonds.

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At present, there is over $100 billion in the DIF, a sum the Treasury official stated was "more than sufficient" to cover the deposits of SVB and Signature depositors.

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Along with protecting these deposits, the Federal Reserve announced a new program called the Bank Term Funding Program in order to provide protection for institutions that are vulnerable to the market instability that has been created as a result of the failure of SVB.

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Banks, saving associations, credit unions, as well as other institutions will be able to take advantage of this new Federal Reserve facility and obtain loans for up to a year. The facility will require those taking advantage of the facility to pledge high-quality collateral, such as Treasury bills, agency debt, and mortgage-backed securities, in order to access the facility.

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A major advantage for banks that hold long-term assets with yields that are lower than the current market rates is that these assets will be valued at par under the BTFP. It is expected that the bonds that are part of the BTFP collateral agreement will be worth more than they are on the open market, where they would be sold at a loss.

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BFTP and the DIF deposit rescue plan were both referred to in an op-ed published on Sunday by the editorial board of Trade Algo as two separate "bailouts."

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Officials from the Biden administration, however, strongly pushed back against the idea that the bank plans constituted a “bailout” of the banks.

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"The equity and bondholders of the banks are being wiped out," said the Treasury official. “Their losses will come as a result of taking a risk as owners of the securities.”

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“The firms are not being bailed out, and the depositors are protected."

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It is clear that the White House strategy is strongly influenced by the public anger that was sparked by taxpayer-funded bailouts of major Wall Street banks during the financial crisis of 2008 that sparked widespread public anger. In order to avoid repeating the same mistake twice, it is expected that the DIF will be used to shore up depositors.

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The President of the United States, Joe Biden, said taping the DIF would ensure that taxpayer dollars would not be at risk.

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In the early hours of Sunday night, there were indications that Biden's plan to use the DIF was already being welcomed on Capitol Hill.

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As a fierce critic of the 2008 bank bailouts, Sen. Bernie Sanders of Vermont said he was strongly in favor of bailing out SVB, but only if it is financially backed by Wall Street and large financial institutions, which is what the DIF is.

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Sanders blamed SVB's collapse on the successful Republican efforts to relax banking regulations, which had been signed into law by former President Donald Trump in 2018, which led to SVB's collapse. Representative Katie Porter, a California Democrat, said she has already begun writing legislation to reverse the Trump-era law that was passed.

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Some Republicans have expressed their support for the federal action that has been taken to stem the fallout that has resulted from SVB and Signature.

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“Our financial regulators are doing their best to ensure the stability of our banking system,” Rep. Patrick McHenry, R-N.C., chairman of the House Financial Services Committee and chairman of the Republican Party, said in a statement earlier this week.

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“It is important that we bring our markets to a calm and orderly resolution,” stated South Carolina GOP senator Tim Scott, who is a potential Republican presidential candidate in 2024.

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But any hint of a political detente was only going to last for a short period of time. As a result, Republicans and Democrats remained deeply divided on the issue of financial regulation, setting the stage for a frenzied debate later this year over who is to blame for the collapse of SVB and how to prevent the collapse of any other major banks.

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A run on SVB's deposits sparked a run on the bank on Sunday after the bank reported that it was struggling, a few days after the bank, a key financier for tech companies revealed that it was struggling. The government closed the signing process on Sunday in accordance with the law.

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There hasn't been a financial institution failure as large as SVB's in the United States since Washington Mutual went under in 2008 and was the largest in the nation at the time.