HomeUS News updateHow the FDIC prevents bank failures and limits contagion effects

How the FDIC prevents bank failures and limits contagion effects

Depositors’ money is fully guaranteed by the FDIC’s Deposit Insurance Fund, a pool supported by fees the agency regularly charges financial institutions. The FDIC requires banks to contribute money to the Deposit Insurance Fund, which can be used to compensate depositors up to a limit of $250,000.

However, if regulators deem a failed bank to be “systemically important” – as they did last week with respect to SVB and Signature – its depositors could be paid for balances in excess of that cap. The insurance limit has been increased several times in the program’s history, most recently during the 2008 financial crisis.

Yellen was asked to clarify Thursday whether the government would freeze all bank customers whose funds exceed the FDIC’s $250,000 limit after doing so for SVB and Signature.

His answer: A bank “only receives that treatment” if regulators determine that it meets certain criteria indicating potential systemic risk from collapse. As a result, he cautioned, depositors at other banks cannot be guaranteed such strong protection, and the FDIC’s standard $250,000 cap continues to apply.

Because the Deposit Insurance Fund is not backed by taxpayer money, the Biden administration has argued that the backstop move does not constitute a bailout.

The systemic risk exception has been invoked earlier. In 2008, the federal government used it to address the mortgage crisis, which put several large US banks at risk.

As Isaac Boltansky, an analyst at financial services firm BTIG, wrote in a recent note to clients, what triggers the systemic risk exception “seems to be a ‘clear case of emergency’ pause for policymakers.”



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