Will US consumers have to bail out struggling banks?

Could taxpayers wind up bailing out wealthy customers at banks such as Silicon Valley Bank, Signature Bank and others that are struggling?

Depends on who you ask.

The White House and fellow Democrats are adamant that taxpayers won’t feel such pain.

“No losses will be borne by the taxpayers. Let me repeat that: No losses will be borne by the taxpayers,” President Joe Biden said after the two California banks failed.

Monday, First Citizens Bank & Trust Company bought “substantially all loans and certain other assets,” of Silicon Valley Bank (SVB). Seventeen SVB branches reopened Monday as a Silicon Valley Bank, a division of First Citizens Bank.

While First Citizens Bank is buying SVB’s loans at a discount, the Federal Deposit Insurance Corporation estimated Monday that the cost of the SVB failure to its insurance fund would be about $20 billion. “The exact cost will be determined when the FDIC terminates the receivership,” an FDIC statement said.

Congressional committees plan hearings this week on the trouble at Santa Clara-based SVB and New York’s Signature Bank. On Tuesday, the Senate Banking Committee plans to hear from top federal regulators, and on Wednesday, the House Financial Services Committee will examine the issue.

What concerns many Washington lawmakers is that if the FDIC continues the practice of compensating all depositors, or if several banks teeter at once, a lot more money would likely be needed.

And that, said many Republicans, would mean consumers could get hit with higher costs. They worry that the financial institutions would pass on their higher fees and costs to consumers and that smaller, healthier institutions would wind up bailing out less responsible banks.

Consumers “are bailing out the banks when FDIC insurance coverage is extended to large deposits,” said Rep. Tom McClintock, R-Elk Grove. “Ultimately that is spread directly to all bank depositors through higher fees. That is a bailout.”

And, tweeted Senate Banking Committee member Cynthia Lummis, R-Wyoming, “it is outrageous to ask Wyoming community banks to foot the bill for the bailout in the form of higher fees.”

Currently, deposits are insured up to $250,000 for each account by the Federal Deposit Insurance Corporation’s deposit insurance fund.

The FDIC’s fund, which taps insured banks for quarterly premiums that provide the insurance, plans to pay all of SVB and Signature deposits, even though most accounts had far above the account limits. If the fund needs more money, the government could tap banks for a special assessment.

A consumer bailout?

There’s no easy answer as to whether consumers will see higher fees, though it appears unlikely.

“President Biden was emphatic in asserting that no taxpayer funds would be used to bail out Silicon Valley Bank and Signature Bank. And the administration is aware of the significant political blowback it would get from using taxpayer funds for future bailouts,” said Peter Lee, professor of law at the University of California-Davis Law School.

He said that while other banks could wind up contributing to cover the costs from uninsured deposits at failed banks, “any cost shifting to consumers in the form of higher fees will probably be less than what Republicans are predicting, particularly because of President Biden’s recent calls to crack down on ‘junk’ fees, such as service fees from banks.”

Biden in his State of the Union address last month called for an end to such fees, often included in the cost of services provided by banks as well as airlines, hotels, ticket sellers and others.

The politics of bailouts

Rescuing failing banks is politically tricky. The administration has been aggressively assuring Americans that the nation’s financial system is stable and protected.

Soon after the collapse of SVB and Signature, federal regulators held briefings for California lawmakers making such assurances.

Not everyone was satisfied. “It was utterly unassuring,” Rep. Ro Khanna, D-Fremont, said. “The FDIC was lost in bureaucracy.”

The regulators issued a strong statement two days after SVB ran into trouble, aiming to reassure the public they were taking strong steps to keep the banking system sound.

“No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer,” wrote Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell and FDIC Chairman Martin Gruenberg. They repeated that assurance for Signature Bank customers..

The Republican skeptics, who insist they also want to encourage a stable financial system, saw the bank issue as another example of an out-of-touch White House.

Sen. Steve Daines, R-Montana, combined the bank policy with Biden’s effort to forgive billions in college student loans.

Such policies show the president is “taking the side of wealthy elites over hard working Montanans,” said Daines, who chairs the National Republican Senatorial Committee..

Democrats countered that taxpayers would not wind up paying for banks’ failures “Taxpayers are not on the hook for that,” said Rep. Barbara Lee, D-Oakland, flatly.

Republicans are not convinced that somehow, consumers will wind up being charged.

“There is no money fairy. There isn’t anything free. Anything free, somebody had to work for,”said Sen. John Kennedy, R-La., a Senate Banking Committee member.

“All the banks in America that are going to have to pay for the President’s bailout,” he said. “They are just going to pass on those costs, including but not limited to their depositors.”