Despite a buyout by JPMorgan (JPM), the collapse of First Republic Bank (FRC) will cost the Federal Deposit Insurance Corporation (FDIC) approximately $13 billion, though neither taxpayers nor the government is footing that bill.
Key Takeaways
- The FDIC has spent roughly $23 billion on bank collapses this year, and is estimated to spend $13 billion more on First Republic Bank.
- That money comes from the agency's Deposit Insurance Fund, which gets money from FDIC-insured financial institutions and interest earned on government bonds.
- While taxpayers may not directly foot the bill, they may still feel the effects.
First Republic is the third high-profile bank that has failed in the U.S. this year and the second-largest in the nation’s history. The FDIC put the bank under a receivership early Monday morning, sold all its assets to JPMorgan, and took the liability hit.
The FDIC had already covered about $23 billion when Silicon Valley Bank and Signature Bank collapsed in March. The federal agency gets this money from a fund known as the Deposit Insurance Fund (DIF) meant to resolve bank failures in an orderly manner.
The FDIC protects bank customers by insuring deposits of up to $250,000 by placing failed banks under receivership and divesting their assets. Deposits in excess of $250,000 are called uninsured deposits and aren’t usually covered by the FDIC’s insurance fund. The ultimate cost of bank takeovers and bailouts is covered by the DIF, which is depleted each time a bank is placed under receivership.
The FDIC’s Deposit Insurance Fund raises money in two ways. The first is through assessments, or insurance premiums on FDIC-insured banks and financial institutions, which pay to register and hold an account with the FDIC. As of December 31, there were 4,706 banks registered with the FDIC.
The second source of revenue is interest earned on U.S. government bonds. Revenues from these two sources add to the balance of the fund, while deposit payouts in the event of bank failures, along with operating expenses, subtract from it. The value of the DIF hit a record $128.2 billion on December 31, prior to this year’s bank failures.
While taxpayers may not directly foot the bill, some losses may ultimately trickle down. For example, if your bank has to pay more for deposit insurance, it might charge you a higher interest rate on a loan or offer you a lower interest rate on your savings account.
In March, after local regulators in California and New York closed down Silicon Valley Bank and Signature Bank, respectively, the FDIC placed these institutions under receivership, assuming control of their assets, liabilities, and deposits. The FDIC made an exception for the two banks that allowed all depositors, even those with deposits greater than $250,000, to be made whole.
The cost to the FDIC would be roughly $20 billion for Silicon Valley and $2.5 billion for Signature Bank. The lion’s share of the two failed banks’ assets were eventually acquired by First Citizens Bank (FCNCA) and Flagstar Bank, respectively.
The failure of the two big banks within a few days set off deep turmoil within the regional banking sector, which dragged down First Republic and led to declines in the share price of regional banks including Western Alliance (WAL), Zions Bancorp (ZION), PacWest Bancorp (PACW), and Charles Schwab (SCHW), as investors grew vary of how much of their deposits were uninsured.
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FAQs
Instead, the money's coming from the Deposit Insurance Fund, which is part of the Federal Deposit Insurance Corporation, or FDIC. Any bank insured by the FDIC has to pay quarterly premiums to the agency.
Do taxpayers pay for bank failures? ›
FDIC Deposit Insurance Fund Balance
While taxpayers may not directly foot the bill, some losses may ultimately trickle down. For example, if your bank has to pay more for deposit insurance, it might charge you a higher interest rate on a loan or offer you a lower interest rate on your savings account.
Who pays for bank failures? ›
The FDIC then markets the assets and liabilities of the failing bank and evaluates the bids it receives. One option that the FDIC is required to consider is a deposit payoff, where the FDIC pays the insured depositors and liquidates the assets. The FDIC can employ two methods to pay off depositors.
Who paid for bank bailouts? ›
The bank was bailed out by the Federal Deposit Insurance Corporation (FDIC), Federal Reserve and Office of the Comptroller of the Currency.
Who pays for FDIC bailouts? ›
Most of the cost will likely be covered by proceeds the Federal Deposit Insurance Corp. receives from winding down the two banks. Any costs beyond that would be paid for out of the FDIC's deposit insurance fund.
Can banks seize your money if economy fails? ›
Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution.
Which president bailed out the banks in 2008? ›
President Bush signed the bill into law within hours of its enactment, creating a $700 billion dollar Treasury fund to purchase failing bank assets. The revised plan left the $700 billion bailout intact and appended a stalled tax bill.
Did Bank of America pay back bailout money? ›
Bank of America, which announced its agreement with the U.S. Treasury to repay TARP last week, funded the repayment through a combination of cash on hand and the sale of $19.29 billion of securities that would convert into common stock. The stock increase remains subject to shareholder approval.
Can FDIC run out of money? ›
Still, the FDIC itself doesn't have unlimited money. If enough banks flounder at once, it could deplete the fund that backstops deposits. However, experts say even in that event, bank patrons shouldn't worry about losing their FDIC-insured money.
What was the biggest bank bailout in history? ›
The biggest bailout for the banking industry was the government's Troubled Asset Relief Program (TARP), a $700 billion government bailout meant to keep troubled banks and other financial institutions afloat. The program ended up supporting at least 700 banks during the 2007–08 Financial Crisis.
JPMorgan Chase paid the largest share, at $2.9 billion, to replenish the agency's deposit insurance fund following last year's bank failures. The bank reported $49.6 billion in annual net income.
Do taxpayers bail out banks? ›
Over the course of 500 years, nations have become richer, financial technology has evolved, and governments have discovered new and different ways to manage their economies. Yet banks still run into trouble, the same now as then, and governments continue to stand by them; eventually, they bail out the banks.
What bank will insure $100 million dollars? ›
If you have more than $250,000 to protect, Kleberg Bank can provide up to $100 million in expanded FDIC Insurance coverage to protect all of your deposits. Avoid the hassle and inconvenience of multiple trips to different banks.
Do you still owe money if a bank collapses? ›
Although debts are a liability for you, they're lender assets. When a lender files for bankruptcy, it must sell its assets to gain liquidity. So, no, your loans aren't forgiven if your lender goes bankrupt. You're still responsible for making payments.
What pays people back if their money is lost when a bank fails? ›
Most banks in the US are insured by the FDIC, which provides coverage up to $250,000 per depositor, per FDIC bank, per ownership category. In the event of a bank failure, insured deposits are guaranteed to be returned within two business days by the FDIC.
Where does the money go when a bank fails? ›
In most cases, when a bank fails, another bank acquires the failing institution, and your direct deposits are automatically routed to an account at the new bank. However, if you're uncertain about where your next direct deposit will wind up, contact the office location of the failed bank.
