‘Is this a bailout?’ and six more questions about the weekend bank collapses

The U.S. government announced late Sunday that it would guarantee all deposits at Silicon Valley Bank, which regulators shut down Friday. Officials also revealed that they had shut down a second bank, Signature Bank of New York, and extended the same deposit protections to its customers. And the Federal Reserve announced it would create a separate lending facility to protect other banks from the ripple effects and prevent bank runs.

The moves capped three days of frenzied activity in the tech sector and among the nation’s top banking regulators, who feared the collapse of SVB could quickly trigger a much broader financial crisis.

“Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system,” said a joint statement from the Treasury Department, the Fed and the Federal Deposit Insurance Corporation.

That statement likely represents the beginning, not the end, of a debate over the federal response to the crisis. Here’s what you need to know about the bank rescue plan.

[Biden says Americans can have confidence in banking system despite 2 collapses]

Why did the government step in?

When regulators took over SVB on Friday, many financial experts thought the bank’s collapse would have little impact on the broader U.S. economy.

After all, Silicon Valley Bank’s customer base mirrored its name: Its customers were venture capitalists, start-ups and other firms across the technology sector, which had laid off thousands of workers in recent months with few ill effects on the booming national economy.

But it slowly became clear that the failure might cause bigger problems. More than 90 percent of SVB’s deposits exceeded the $250,000 limit for federal insurance on bank accounts. Customers had already started moving their money to other banks. Once SVB shut down, many companies worried they might not be able to pay their workers, and many depositors faced the prospect of losing very large amounts of cash.

That, in turn, seemed to stoke fears about the security of business deposits in some other banks. Those fears may have been irrational, given the unique circumstances that contributed to SVB’s collapse. But they could lead people to pull money from those institutions, too, causing more bank runs.

While the financial system overall continued to function relatively normally on Friday, the stock prices of more than a half-dozen banks with tech exposure - including PacWest and Signature Bank - saw their stock prices tumble by more than 20 percent, according to Paul Goldsmith-Pinkham, a Yale professor of finance. Federal officials realized that business executives across the country might simultaneously decide to move their money to a bigger Wall Street bank. That could have destabilized many smaller banks. So they decided they had to act before banks opened on Monday.

What does the rescue plan do?

Officials tried to short-circuit the logic of a bank run and restore depositors’ confidence that their money is safe.

The Federal Deposit Insurance Corporation will guarantee all deposits at SVB and Signature - even those above the usual $250,000 limit. SVB held roughly $150 billion in uninsured deposits, and Signature Bank held more than $70 billion in uninsured deposits. Those customers will be able to access all their funds now, even though the banks collapsed. This sends the message that customers have no reason to move their money, because they won’t lose it if their bank goes down.

The government also tried to ensure that most banks don’t get close to failing in the first place. So the Federal Reserve announced a new special lending facility with unusually generous terms: It will loan money to banks that put their assets up as collateral, even if those assets are worth less now than what the bank paid for them. Typically, the central bank only lends against the current value for a bank’s assets, according to Todd Phillips, who served as an attorney at FDIC. The move means banks shouldn’t have trouble getting access to cash if customers start withdrawing funds.

President Biden also said Monday that he would push Congress and banking regulators “to strengthen the rules for banks to make it less likely this kind of bank failure would happen again and to protect American jobs and small businesses.”

Is this a government ‘bailout’?

The announcement Sunday immediately set off a debate over whether these actions amount to a federal “bailout.”

On a call with reporters, a Treasury official emphasized that the federal intervention would not bring SVB or Signature back to life, as the enormously controversial bank bailouts during the 2008 financial crisis had done for banks that were close to failing. Their executives would not retain their jobs. These new safeguards were aimed at protecting people and businesses who had made a reasonable decision to put their money into an accredited and regulated bank - not investors who bought risky securities.

Crucially, the Treasury official also emphasized, the money used to reimburse the depositors would come from a fund paid into by U.S. banks. Treasury Secretary Janet L. Yellen and Biden both released statements Sunday night underscoring that taxpayers will not pay to rescue depositors because the bank fund would cover any costs.

“We are trying to help depositors of institutions. The banks, equity and bondholders are being wiped out,” the Treasury official said. “The firms are not being bailed out. The depositors are being protected.”

[Bailout talk roils Washington after Silicon Valley Bank’s collapse]

But other economists - including some Biden allies, and even those who defended the move as necessary - still say the measures amount to a bailout. Even though the fund is paid into by U.S. banks, it is ultimately backstopped by the Treasury Department, potentially putting taxpayers on the hook if it runs out.

The Treasury official said the fund has more than $100 billion in it and is highly unlikely to dip below $0. Any losses to the fund would be repaid in full by charging more fees to banks, the Fed, Treasury and FDIC said in a statement. Additionally, Treasury’s Exchange Stabilization Fund also will provide $25 billion to backstop the Fed’s loan program. The Fed does not anticipate that it will be necessary to draw on the funds, officials told reporters.

“It puts government money at risk. Will they end up having to pay anything from it? Probably not. But they’re definitely giving some great value to the depositors at that bank,” said Dean Baker, an economist at the Center for Economic and Policy Research, a left-leaning think tank. “It is a special intervention. It was not in the rules. It is a bailout.”

Is this move legal?

To cover uninsured deposits, federal officials first had to determine that the banks’ collapse posed a “systemic risk” to the financial system - something that could topple not just one or two banks but the industry more broadly.

This could prove one of the most debated questions about the federal intervention. Some outside experts had been seriously skeptical that SVB’s collapse posed a systemic risk. A few observers even wondered if SVB depositors and investors in companies that banked there - who had a financial interest in having all deposits safeguarded - overhyped the broader economic risk precisely to secure federal aid.

Anil Kashyap, a professor at the University of Chicago’s Booth School of Business, had said over the weekend: “This isn’t a systemic event. This is a midsize bank that was badly managed.”

Yet the nation’s top banking regulators determined that a systemic risk did exist, though they have not yet released an analysis demonstrating their findings. Approval of the measures required a two-thirds vote of the boards of the Fed and FDIC. Both the Fed and FDIC did so unanimously.

Are looser regulations adopted in 2018 to blame?

Since SVB’s collapse, some financial experts have focused on a bank deregulation bill that Congress approved on a bipartisan basis in 2018 and President Trump signed into law.

The law repealed a range of oversight requirements for banks with between $50 billion and $250 billion in assets. At the time, the regional banks argued to Congress that they did not pose the kind of systemic threat that the Wall Street giants did. They maintained that as a result they deserved less scrutiny, and Congress obliged.

When SVB collapsed, it had about $200 billion.

“Congress gave regulators permission to take their eyes off of these mid-sized regional banks,” said Phillips, the former FDIC attorney who is now at the Roosevelt Institute, a left-leaning think tank.

But other experts, including some who opposed the deregulatory bill, think the exact connection is unclear. SVB suffered in particular from the drop in the value of its holdings of U.S. Treasury bonds as interest rates rose, which are typically regarded as a safe asset. Federal authorities could have missed that even without the regulatory change.

“I think it’s relevant, but I don’t think we know if it’s the main cause here,” said Bob Hockett, a Cornell University professor and former Fed official. It is possible SVB would have faced “enhanced prudential regulation” - the industry term for extra oversight - “but we don’t know what that would have been,” Hockett said.

When will depositors get their money?

The statement from the Treasury and Federal Reserve said depositors would have access to all of their money starting Monday.

On Friday, the FDIC had only said uninsured depositors could expect to receive a portion of their deposits back sometime the following week. Insured depositors were always going to be able to access their accounts.

What happens next?

Federal authorities will be hoping that their actions on Sunday calm financial markets and assure that there is no widespread attempt to pull bank funds.

More broadly, Congress is expected to soon begin debate on measures designed to prevent similar crises from occurring next time around. These could include new banking regulations, changes to the FDIC insurance regime, and other laws aimed at improving the stability of the banking system.

“Preventing bank runs is the immediate fire to put out, but the underlying problem that weakened Silicon Valley Bank — and may also leave other banks susceptible — has yet to be addressed,” said Simon Johnson, an MIT economist, in a Los Angeles Times op-ed published Monday.