SVB collapse: Was it a bailout?
Zachary Halaschak
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The federal government’s decision to make depositors at Silicon Valley Bank whole after its sudden collapse has raised questions about whether the intervention constituted a bailout.
The FDIC announced on Friday that SVB had failed and been taken into government hands, and regulators also later closed major crypto lender Signature Bank. In an effort to stop a run on other banks and a hit to the broader economy, the federal government announced that it would back all deposits in the banks, even those in excess of the FDIC’s $250,000 threshold.
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The Federal Reserve also rolled out a new source of funding for banks that might face runs by depositors, called the Bank Term Funding Program.
The aggressive moves raised comparisons to the big bank bailouts in the 2008 financial crisis.
Camden Fine, the CEO of Calvert Advisors and the former head of the Independent Community Bankers of America, a major industry group for smaller banks, said that the government’s efforts constituted a bailout.
“Wealthy Venture Capitalists and high flying risk takers were bailed out at the expense of local community banks on Main Street,” Fine wrote in an email to the Washington Examiner.
The White House, on the other hand, maintains that the actions were not a bailout because taxpayer funds were not committed to the banks.
“This is not a bailout. This is not 2008 at all,” White House press secretary Karine Jean-Pierre said to reporters aboard Air Force One on Monday. “The funds are from fees on banks and not taxpayers so this is very different from what we saw in 2008.”
Bill Ackman, billionaire investor and founder of Pershing Square, also said over the weekend that the move by regulators “was not a bailout in any form” and is different from what happened during the global financial crisis.
The 2008 bailouts were different in that Congress approved a rescue using taxpayer funds in the form of the Troubled Assets Relief Program and propped up big banks. Those bailouts made the banks whole, keeping investors and employees above water. These most recent moves, by contrast, still allowed investors to go to zero and removed the management teams of the banks.
The question at the heart of the debate, then, is whether rescuing depositors alone constitutes a bailout.
Fine argues that making the depositors whole is a bailout because the wealthy in Silicon Valley were allowed to stay afloat as part of the plan. And, although taxpayers won’t directly foot the bill, the public will still bear the costs because the funds will come out of the FDIC deposit insurance fund, which is paid for by other banks — meaning customers at other institutions will eventually pay the price.
“And now local Main Street community banks have to pick up the tab for bailing out these people and firms. And that cost will find its way to the consumer on the street. There is nothing for free here,” Fine said.
There is also the question of whether the move creates malign incentives for depositors to avoid paying attention to their funds.
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The creation of the Bank Term Funding Program offering up to one-year loans to banks and other qualifying financial institutions at par is also a sort of bailout, said Doug Holtz-Eakin, the director of the conservative think tank American Action Forum and the former director of the Congressional Budget Office.
“In particular, if you’re holding these long Treasurys that have lost their value, you can go to this Fed program, give them the Treasurys, and they will give you the face value as a loan,” Holtz-Eakin said. “So that’s essentially pumping in more than it’s worth at that moment, which is much like the classic bank bailout on a smaller scale.”