FDIC spent $20 billion to handle Silicon Valley Bank collapse

The collapse of Silicon Valley Bank (SVB) set the Federal Deposit Insurance Corporation (FDIC) back only $20 billion while the failure of Signature Bank cost just $2.5 billion, according to prepared remarks by FDIC Chair Martin Gruenberg set to be delivered in front of the Senate Banking Committee on Tuesday.

That’s just a fraction of the $128 billion deposit insurance fund (DIF) the federal bank insurer maintains in the event of bank runs. Such runs have sent shockwaves in recent weeks throughout the global economy and have led to widespread fears about a greater, 2008-style contagion.

“Of the estimated loss amounts, approximately 88 percent, or $18 billion, is attributable to the cost of covering uninsured deposits at SVB while approximately two-thirds, or $1.6 billion, is attributable to the cost of covering uninsured deposits at Signature Bank,” Gruenberg’s remarks say.

“I would emphasize that these estimates are subject to significant uncertainty and are likely to change, depending on the ultimate value realized from each receivership,” Gruenberg will caution.

Gruenberg, along with Federal Reserve Vice Chair for Supervision Michael Barr, will give updates on Tuesday on an ongoing investigation into failures of the bank managers.

“SVB’s failure is a textbook case of mismanagement. The bank had a concentrated business model, serving the technology and venture capital sector. It also grew exceedingly quickly, tripling in asset size between 2019 and 2022,” Barr is set to testify. “The bank did not effectively manage the interest rate risk of those securities or develop effective interest rate risk measurement tools, models, and metrics.”

“The FDIC has authority to investigate and hold accountable the directors, officers and other professional service providers of the bank for the losses they caused to the bank and for their misconduct in the management of the bank,” Gruenberg’s testimony reads.

The limited sums suggest the latest failures in the banking industry may not have as far-reaching an effect as some analysts had been concerned about.

They also beg the question of whether the federal government’s response, which comprised not only the appeal to the DIF but also a separate taxpayer-backed line of credit extended to banks amounting to hundreds of billions of dollars, was an overreaction.

“I would not have declared Silicon Valley and Signature systemic. There are combined assets of $300 billion in a $23 trillion banking system,” former FDIC chief Sheila Bair said earlier this month. “I don’t think there would have been any systemic ramifications for putting a slight haircut on the uninsured depositors, which were those who were bailed out.”

“I think the optics around this, especially bailing out Silicon Valley Bank’s uninsured depositors – well-heeled Silicon Valley venture capitalists and their portfolio companies that they are – I think those are terrible,” she said.

Bair added she thought an advanced dividend to the uninsured of 70 or 80 cents on the dollar along with an explanation to account holders would have been sufficient to calm the situation without resorting to further guarantees that put taxpayer money on the line.

The modest dent in the DIF also raises the question of whether the extra line of credit set up by the Fed and Treasury and backstopped by taxpayer money was excessive.

Over the last couple of weeks the Fed has undone more than half of the asset shedding – known as quantitative tightening – that it began in March of last year in response to elevated inflation.

Between March 8 and March 22, the Fed has added nearly $400 billion to its balance sheet, which has climbed to $8.7 trillion from $8.3 trillion at the beginning of the month. 

Fed Chair Jerome Powell has said he doesn’t “intend” for the asset purchases to represent a departure from the U.S.’s tighter monetary policy, but the extent to which the loans extended by the Fed have made it into the wider economy isn’t yet known.

“It’s not intended to directly alter the stance of monetary policy,” Powell said during a press conference last week. 

“We think that our program of allowing our balance sheet to run off predictably and passively is working,” he said of the expanded balance sheet in regard to increased financial stability.

Public opinion polling shows that Americans hate the idea of bailing out failed banks.

“84 percent of Americans agree – 56 percent agree strongly – that taxpayers should not have to foot the bill for irresponsible bank management, including 85 percent of Democrats and 86 percent of Republicans,” a March poll by Ipsos found.

“They should be focused more on the middle class, the average taxpayer instead of bailing out big banks,” business student Victoria St. Louis told The Hill earlier this month. “There seems to be a system in place where banks can get away with essentially not making the proper investments.”