As solvency concerns among U.S. regional banks have recently emerged, many investors worry that the next banking crisis may be just around the corner. Policymakers and economists dispute whether the U.S. taxpayer will be responsible for bailing out distressed banks or if the Federal Deposit Insurance Company (FDIC) can fully support additional stress on the U.S. banking system.
Following the failures of Silicon Valley Bank (SVB) and Signature Bank, President Biden has stated that taxpayer money will not be used to bail out losses from the collapse of these banks and that the money would come solely from the FDIC. One week later, depositors intensified a bank run on First Republic Bank. At the encouragement of Janet Yellen, Secretary of the Treasury, several large banking institutions provided a backstop of funds to prevent a third bank from failing in a matter of weeks.
The U.S. government seems resolved to preserve confidence in the U.S. banking system and prevent an echo of the 2008 financial crisis. But can investors realistically expect the FDIC to continue supporting more troubled regional banks if more problems unfold in the coming year?
Despite President Biden’s initial assurances that the banking system is stable and that FDIC can support failing institutions, the concerning reality is that there are significant limitations to the available funds without government intervention. The Federal Reserve and the Department of the Treasury have already begun to take steps to establish additional funds, which, if used, will possibly fall upon taxpayers to support.
How Solvent is the FDIC?
The FDIC can bail out distressed banks by tapping the Deposit Insurance Fund (DIF), which totaled $128.2 billion at the end of 2022. The FDIC has established a long-term goal for the DIF to reach 2% of total U.S. insured bank deposits, but at the end of 2022, the ratio sits at only 1.27%.
Silicon Valley Bank’s deposits reached over $175 billion before customers began demanding their deposits in anticipation of the bank’s impending failure. Most individuals understand that up to $250,000 of their savings in a bank account is insured by FDIC. However, in the case of Silicon Valley Bank, most deposits were uninsured and held by large institutions. Nevertheless, the government decided to insure these deposits to prevent any uncertain confidence that could rattle the entire banking system.
The FDIC does have the authority to borrow up to an additional $100 billion from the Treasury Department, subject to the Secretary of the Treasury. In order to prevent widespread panic and loss of faith in the U.S. banking system, it is inconceivable that the U.S. government would support backstopping the FDIC and guaranteeing insured deposits for any failing bank.
Quietly Raising Taxes
The FDIC has already overextended its available funds to support SVB and Signature Bank. By borrowing money from the Federal Reserve to support the depositors of these fallen banks, the Fed is yet again enacting expansionary monetary policy. Although the government may insist that no explicit taxes are being levied on individuals, the effects of increasing the money supply have recently caused considerable inflation.
Whether the Federal Reserve or the Department of the Treasury puts up supplementary funds for FDIC to bail out any additional banks, the net effect will be an increase of money into the economy, leading to further pressure on prices. Although inflation is not identical to raising taxes, it will have the same overall economic impact. As a result, individuals will have less purchasing power and be able to buy fewer goods and services with their money.
Should You Be Concerned?
History has shown that long-term investors are often best served by keeping their portfolios invested in the markets and not panicking or removing assets during times of distress. However, with FDIC funds conceivably under pressure, ensuring that any individual bank account does not have more than the insured $250,000 limit is prudent.
The FDIC insures $250,000, per depositor, per insured bank, per account owner. Different ownership categories, such as individual, joint, and revocable trust accounts, are separately insured. Each owner, co-owner, or beneficiary listed on the account can increase the insured limit by an additional $250,000 for each person for each account type. Additionally, there is no downside to having multiple bank accounts at multiple institutions so long as there are no applicable minimum balance or inactivity fees.
Investors should expect the turmoil in the regional banking sector to continue throughout the year. As this crisis unfolds and stability returns, some banks will likely get rescued or acquired with terms that diminish the equity of previous stockholders. As only time will tell which companies will suffer the most, the smart course for most investors is to keep holdings diversified amongst a breadth of sectors and international markets.
FDIC Future Outlook
As scrutiny on banks’ balance sheets continues to unwind over the year, it is foreseeable that more institutions will require backstops from the government to protect against bank runs and systemic failure. Recent support by the Fed and lessons learned from The Global Financial Crisis of 2008 have taught us that the government will likely prevent the entire regional banking system from collapsing, but this will likely require an expansion of the Fed’s balance sheet and an increase of money supply into the economy.
The Fed will likely be torn between balancing the complications of rising prices against an impending recession. Nevertheless, predicting the future of the economy is uncertain, but protecting your savings by keeping account balances within the current FDIC limits is one undeniably shrewd move that everyone should take.
Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.
Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.