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1 1 (March 23, 2023)

handle is hein.crs/govekzs0001 and id is 1 raw text is: Congressional Research Sen Informing the Isgislitive debate since 1914 Bank Failures and the FDIC This In Focus provides an introduction to the Federal Deposit Insurance Corporation's (FDIC's) process for resolving failing FDIC-insured banks. It also identifies policy issues Congress may consider related to the recent failures of two large banks in 2023-Silicon Valley Bank (SVB) and Signature Bank (SB). Overview of Bank Failures Banks fail for many reasons, although most trace back to the management of bank resources, resulting in a bank's inability to meet liquidity or capital requirements. Liquidity is the ability of a bank to meet cash flow needs, including deposit withdrawals by its customers. Capital (equity) is the difference between assets and liabilities. A bank's capital helps absorb losses on loans, securities purchased by the bank, and other assets while the bank remains solvent. When a bank's capital situation deteriorates such that it fails to meet minimum regulatory standards, the bank's primary federal regulator is required to take prompt corrective action (PCA). Regulators typically issue a PCA letter advising the bank on specific actions it must take to restore itself to financial health. When a critically undercapitalized bank fails to meet PCA requirements, its chartering agency will typically close the bank. By law, the FDIC is appointed receiver. Bank Failures, 2001-2020. There were 561 bank failures between 2001 and 2020 (see Table 1). The failed banks collectively held $721 billion in assets and $522 billion in deposits. In nominal dollars, the largest bank failure in U.S. history was Washington Mutual Bank in 2008 with $307 billion in assets and $188 billion in deposits. Most depository institutions that failed were relatively small banks, with a large majority having less than $1 billion in deposits. Not all banks fail after becoming distressed-the number of problem banks identified by the bank regulators reached a high of 884, representing $390 billion in assets at the end of 2010. In response to the bank failures between 2007 and 2010 and the related financial crisis, the Dodd-Frank Wall Street and Consumer Protection Act in 2010 (P.L. 111-203) was enacted to reform the financial regulatory system. The act permanently increased the deposit insurance limit from $100,000 to $250,000. Subsequently, in 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (P.L. 115-174) was enacted, providing banks regulatory relief from certain requirements. Bank Failures, 2021-2023. There were no bank failures in 2021 or 2022. The two bank failures in 2023-SVB and SB-collectively held $319 billion in assets and $264 billion in deposits (see Table 1). The second-largest bank failure in U.S. history was SVB, with $209 billion in assets and $175 billion in deposits. SB had $110 billion in assets Updated March 23, 2023 and $89 billion in deposits when it failed. The number of problem banks as of Q3 2022 was 39, with combined assets of $47.5 billion. Deposit Insurance Fund (DIF). Deposit insurance guarantees repayments of deposits at a bank up to the statutory insured limit, $250,000. It is intended to protect depositors, prevent bank runs, and reduce the risk of systemic failure of the banking system. Banks pay deposit insurance premiums to the FDIC, which maintains the DIF to meet its obligations of insuring deposits and resolving failed banks. Since the start of federal deposit insurance in 1934, all depositors have been made whole up to their insured limits after bank failures. Table I. Bank Failures 2001-2023 Bank Assets Deposits Failures (in billions) (in billions) 2001-2020 561 $721 $522 2021-2023 2 $319 $264 Source: CRS with data from FDIC, Bank Failures in Brief. Notes: As of March 22, 2023. The FDIC deposit insurance is backed by the full faith and credit of the United States through a line of credit with the U.S. Treasury. While the DIF was funded to its statutory limit before the last financial crisis, bank failures rapidly depleted it during the crisis. The DIF balance was at its lowest at the end of 2009 with a negative balance of $20.9 billion. Through regular bank assessments the FDIC has increased the DIF to $128.2 billion as of December 2022. The fund has remained largely self-financed with some borrowings from the Treasury. As of year-end 2022, the FDIC insured deposits of nearly $10 trillion at 4,715 banks. Total deposits at the end of 2022 were over $19 trillion- with FDIC insuring nearly 50% of all deposits. Overview of the Resokition Process As receiver of a failed bank, the FDIC evaluates all possible resolution alternatives and selects the one that is least costly to the DIF, per statute, unless the systemic risk exception (described below) is invoked. Typically, uninsured depositors, creditors, and shareholders are not protected against losses in order to meet the least cost requirement. The FDIC normally uses two main resolution methods: (1) purchase and assumption transactions and (2) deposit payoffs. Another method, bridge banks, is a type of resolution method the FDIC has used on a limited basis to resolve large or complex failing banks. Purchase and Assumption Agreement (P&A). The most commonly used resolution method is the P&A with an acquirer. The FDIC seeks bids from qualified bidders for

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