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               Researh Sevice

The CARES Act (P.L. 116-136) Section 4008:

FDIC Bank Debt Guarantee Authority

April 2, 2020

Section 4008 of the Coronavirus Aid, Relief, and Economic Security Act (CARES; P.L. 116-136)
authorizes the Federal Deposit Insurance Corporation (FDIC) to guarantee certain deposits that are not
eligible for regular FDIC deposit insurance due to the existing $250,000 per account insurance limit. This
broadens FDIC authority from Section 1105 of P.L. 111-203 (Dodd-Frank Act) to establish a program that
would guarantec bank debt in the event of a financial liquidity crisis. Section 4008 also preemptively
grants the requisite congressional approval for any such program needed to respond to the COVID- 19
outbreak, provided the FDIC guarantee terminates no later than December 31, 2020. This Insight provides
an overview of FDIC guarantees and Section 4008.

General Background

To banks, deposits and debt are liabilities that place inflexible repayment obligations upon them. If an
event occurs that causes depositors or creditors to doubt the banking industry's health-such as a
financial crisis or the prospect of widespread loan defaults due to a pandemic-they may have an
incentive to withdraw their funding. Because banks face a liquidity nfiniatch wherein their assets' value
depends on long-term repayment and their liabilities are relatively short term, this incentive may cause
otherwise healthy banks to fail to meet their obligations. Put simply, depositors and creditors would not be
able to get their money back. This prospect can cause panic and bank runs.
Traditional bank runs saw depositors withdraw money from their bank accounts en masse. In a self-
fulfilling prophecy, fear of bank failures caused banks to fail. A number of laws, regulations, and
government programs have been implemented to address this problem. Notably, in response to the
widespread bank failures during the Great Depression, in the Banking Act of 1933 (P.L. 73-66), Congress
created the government-backed FDIC to insure deposits up to a limit of $2,500. The statutory limit has
been raised over the years, mostly recently by Dodd-Frank. Currently, it is $250,000 per depositor, per
bank. With this government guarantee, there has been little incentive for depositors to run.
While government guarantees for banks protect individuals and businesses from losses, they present
potential challenges. One is that they potentially expose the government, and thus ultimately taxpayers, to
losses. In addition, guaranteeing bank liabilities may create moral hazard, wherein banks take on more

                                                                Congressional Research Service

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