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1 1 (March 27, 2023)

handle is hein.crs/govelav0001 and id is 1 raw text is: Congressional Research Service nforming the legislitive debate since 1914 0 March 27, 2023 Deposit Insurance and the Failures of Silicon Valley Bank and Signature Bank Congress created the Federal Deposit Insurance Corporation (FDIC) in the wake of the Great Depression to limit the losses depositors would face if their banks failed. It did so to instill confidence in the banking system and deter economically detrimental events such as bank runs. This In Focus examines the role of deposit insurance in the financial system and addresses policy considerations for the 118th Congress in the wake of recent turmoil in the banking system precipitated by the failures of Silicon Valley Bank (SVB) and Signature Bank. Deposit Insurance When a bank fails in the United States, consumer deposits are guaranteed up to a certain amount by the government. This is designed to create trust in the banking system between consumers and institutions, and that trust is intended to promote liquidity in banks by allowing them to keep fewer reserves and make available more credit. Over time, the amount guaranteed by these insurance schemes has increased, and today it is $250,000 per account (12 U.S.C. §1821). Which Accounts Are Covered? A number of accounts are eligible for deposit insurance, while others are explicitly not covered. Deposit insurance is limited to certain bank-offered products and accounts. Examples are shown in Table 1. Table I. Financial Accounts and FDIC Coverage Examples of Types of Accounts/Products, by Coverage Eligibility Covered Not Covered Checking accounts, savings Stock investments, bond accounts, money market investments, mutual funds, accounts, certificates of crypto assets, life insurance deposit, and certain prepaid policies, annuities, municipal cards securities, safe deposit boxes or their contents Source: FDIC. Notes: Depositors can own multiple insured accounts in different ownership categories, thereby protecting more than $250,000. Who Pays for Deposit Insurance? The FDIC relies on the Deposit Insurance Fund (DIF) to facilitate deposit insurance payouts and to cover the cost of resolving a failed institution. The DIF is funded in two ways: quarterly assessments on banks and interest earned on funds invested in U.S. government securities. Assessments are calculated by multiplying a bank's assessment base by its assessment rate. The base is defined by P.L. 111-203 as average consolidated total assets minus tangible equity. In other words, it is based on total liabilities. Title 12, Section 1817(1)(A) of the U.S. Code requires the FDIC to establish a risk-based system to calculate the assessment rate tied to an institution's probability of causing a loss to the DIF. The way risk-based rates are calculated differs for larger and smaller institutions. Section 1817(3)(B) requires the FDIC to set a reserve ratio (DIF balance/estimated insured deposits) of no less than 1.35%. The FDIC is also authorized to impose any special assessments necessary to maintain the DIF or repay any amounts borrowed from Treasury to manage the cost of a bank failure. Section 1824 allows the FDIC to borrow up to $100 billion from Treasury if needed to supplement the costs of bank failures. In this sense, the DIF is said to be backed by the full faith and credit of the U.S. government. What Happens When a Bank Fails? The FDIC serves to protect depositors when a bank fails. The FDIC typically resolves a bank by seeking an acquirer to purchase as many of the bank's assets and liabilities as possible, thus minimizing the amount left in the receivership. To do this, the FDIC uses a bidding process designed to end in the purchase and assumption of some or all of the failed bank's assets, deposits, and certain other liabilities. Occasionally, the FDIC will directly pay the depositors up to the insured limits if it cannot find a reasonable purchase and assumption alternative. Pursuant to Title 12, Section 1821(d)(11), of the U.S. Code, the FDIC must prioritize the payout of certain claims on the assets of the failed institutions. Similar to bankruptcy proceedings, when a payout occurs, there is a hierarchy of claims for the FDIC to follow, as detailed in Table 2. Table 2. Depositor Preference By Order of Claims Paid by FDIC, First to Last Hierarchy of Claims FDIC Administrative Expenses Insured Deposits Uninsured Deposits General Creditors Stockholders Source: 12 U.S.C. §1821(d)(l 1).

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