Banks are primarily considered to be infallible financial institutions, but that doesn’t mean they can’t fail. Throughout history, we’ve seen banks fail many times, and the aftermath isn’t always pretty. The 2023 failures of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank were the largest bank failures in the history of U.S. bank bailouts. In the days leading up to each of these local banks’ failures, customers rushed to withdraw billions of dollars as stock prices plummeted. Government intervention helped taxpayers, but bank investors fell short.
However, this is not the only time banks have needed help in the past. Here we take a look at what a bank bailout is by considering some notable examples of bank bailouts in the past.
What is a bank bailout?
The term “rescue” is typically applied to situations in which funds (often in the form of cash or loans) are provided to a distressed company to save it from collapse. The recipient can be a bank, business, or another type of organization.
The overall purpose of governments deciding to bail out banks and other businesses may be to protect the national economy, which would otherwise be dire due to factors such as job losses and lack of investor confidence. This may lead to negative consequences.
The concept of bailouts often has negative connotations because it is associated with banks and other businesses that require government assistance as a result of reckless risk-taking. Hundreds of billions of taxpayer dollars were used to bail out banks and other businesses during the 2007-2008 financial crisis and the savings and loan crisis of the 1980s and 1990s.
Bank failure vs bank bailout
Bank failure and bank bailout are often confused, but they are actually two different things. Bank bailouts occur before banks fail. This is a last-ditch attempt to save failing banks before they fail. The bailout would provide much-needed funds to completely reduce or eliminate debt, and the new bank would take over the bank’s assets and liabilities. If no relief is available, the Federal Deposit Insurance Corporation (FDIC) will step in to help customers who have lost money.
In the cases of Silicon Valley Bank and Signature Bank, the federal government made the unusual decision to cover all deposits, including deposits that exceeded federal insurance limits. This drew criticism from those who likened it to the widespread government bailout during the 2008 financial crisis, which cost taxpayers $700 billion to rescue distressed banks and other companies. .
Within two months of the SVB and Signature Bank failures, the FDIC took over the beleaguered San Francisco-based First Republic Bank on May 1, 2023, and transferred most of its operations to JPMorgan Chase. Sold to. The failed bank’s 84 branches in eight states began operating on the same day the bank was foreclosed, reopening as Chase branches.
The FDIC provided JPMorgan Chase with $50 billion in funding as part of the deal, which some say amounted to a bailout, but the money did not come from individual taxpayers. Rather, it leverages the FDIC’s Deposit Insurance Fund, which is funded by insurance premiums from banks and investments from insurance proceeds.
Weeks before First Republic’s collapse, JPMorgan Chase, Citigroup, Bank of America, Wells Fargo and seven other major banks teamed up to provide $30 billion in bailouts to the failing bank. Injected. But in the end, First Republic’s collapse came a week after it released a disastrous first-quarter earnings report.
History of government relief
To better understand the 2023 bank bailout, let’s take a look back in history to see how we got here.
2007-2008 financial crisis
During the U.S. housing boom of the mid-2000s, many high-risk mortgages were created targeting low-income homebuyers with poor credit histories and little information. By 2007, the country experienced a subprime mortgage crisis when mortgage companies began filing for bankruptcy and there was no longer a market for the mortgages they owned.
Global financial firms Lehman Brothers and Bear Stearns went bankrupt primarily due to their involvement in subprime lending. U.S. home prices have plummeted, and millions of homeowners owe more on their mortgages than their homes are worth.
This led to the Great Recession, a period of economic downturn that lasted from December 2007 to June 2009. In 2008, the federal government created the Troubled Asset Relief Program (TARP), a $700 billion government bailout program aimed at keeping distressed banks and other businesses afloat. In operation.
Through TARP, approximately $245 billion of taxpayer money was used to stabilize more than 700 banks. As part of the plan, the government would buy preferred stock in failed banks, including Bank of America, Citigroup, Goldman Sachs, JPMorgan, Morgan Stanley, Wells Fargo, Bank of New York Mellon, and State Street Bank. did.
Most of the investments have since been resolved and the government has profited from many of them.
1989 Savings and Loan Crisis
Also known as savings, savings and loans (S&Ls), associations primarily focus on loans that finance residential real estate, often in local communities. In the 1980s and 1990s, heavy investments in junk bonds and the negative effects of double-digit inflation caused many of the country’s S&Ls to fail.
S&Ls were hurt in the 1980s by laws that capped the interest rates they could charge on deposits and loans, causing depositors to look elsewhere for higher returns. As fewer people applied for mortgages due to the recession, many S&Ls were unable to rely on a relatively small number of low-interest mortgage loans to stay afloat.
As a result, Congress intervened and passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. Under the act, the Resolution Trust Corporation was created to provide funds to close hundreds of failed S&Ls and rehabilitate depositors. The bailout ultimately cost taxpayers about $132 billion.
SVB and Signature Bank: Have they been bailed out?
Various politicians, regulators, and analysts have argued that the Treasury Department’s attempts to rescue depositors at Silicon Valley Bank and Signature Bank do not amount to a bailout because they are not using taxpayer funds. There is.
Instead, it is collected from the fees banks pay to the Deposit Insurance Fund. Moreover, neither shareholders nor unsecured debtors are protected, and the burden on taxpayers is zero.
President Joe Biden emphasized in televised remarks on March 13 that he did not consider the government’s actions regarding the two failed banks to be a rescue package. “Taxpayers will not be burdened with any losses,” he said. “Instead, that money comes from fees banks pay to the Deposit Insurance Fund.”
Biden said investors in banks would not be protected. “They deliberately take risks, and if that risk doesn’t pay off, the investor loses money. That’s how capitalism works.”
Yellen reiterated the president’s statements in testimony at a Senate Finance Committee hearing on March 16, 2023. Yellen said the money to replace the deposits at the two failed banks is coming from fees banks pay. “Importantly, this measure does not use or put taxpayer money at risk.”
In a March 12, 2023 announcement (depositors of both failed banks will have access to all their funds), the FDIC, Federal Reserve, and Treasury Department said that “taxpayers will not bear any losses.” Shareholders and some unsecured parties stated the following: Debtors will no longer be protected.
Losses in the Deposit Insurance Fund, which supports uninsured depositors of failed banks, will be covered through a “special assessment of banks”, the regulator’s statement said. In the statement, regulators also said the Fed will provide cash-strapped banks with additional funding in the form of one-year loans through the newly created Bank Term Financing Program.
Critics of the government’s actions regarding failed banks argue that taxpayers could ultimately be affected if the Fed’s loans cause higher inflation.
Opponents of the government’s action include Republican Sen. Josh Hawley of Missouri, who said on March 13, 2023, that it would protect customers and community banks from special assessment fees mentioned in the Fed and other announcements. He said he would introduce the bill. Regulatory authorities.
“What basically happened with these ‘special assessments’ covering SVB is that the Biden administration found a way to make taxpayers pay for the relief package without a vote.” Hawley said in a tweet..
conclusion
Banks are lending institutions, so they can go bankrupt. Bank bailouts have occurred repeatedly throughout history and are almost cyclical in nature. It is an essential part of the economy that involves risk. Bank bailouts are the driving force that keeps the economy in turmoil, and all it takes is an economic shock like the coronavirus pandemic or the housing crisis to throw the economy into turmoil. Over time, from bank failures in 2023 to bailouts in 2008, bank bailouts have proven to be just part of business.
As the United States grapples with trillions of dollars worth of debt, future relief cannot always be financially provided, putting pressure on private institutions to do the heavy lifting. Meanwhile, government oversight has increased and banking processes continue to be fine-tuned in hopes of reducing the likelihood of future bank bailouts.
–Freelance writer Lena Borrelli Contributed to updating this article.
