Following this weekend’s decision by the Treasury, Federal Reserve, and FDIC to invoke the systemic risk exception to backstop uninsured depositors at Silicon Valley Bank and Signature Bank, President Biden emphasized that “no losses will be borne by the taxpayer” in an effort to avoid criticism that the administration was bailing out the two troubled financial institutions and their investors. This is tortured logic. The uninsured depositors at these two banks are receiving insurance that they never paid for, backed by the full faith and credit of the US government.

In other words: the taxpayer.

We estimate that the value of this subsidy is in excess of $100 billion. Here’s our math.

FDIC deposit insurance is funded by a fee charged to regulated banks. For every $100 in insured deposits, the FDIC currently holds $1.27 in reserve to cover potential losses resulting from bank failures. As of December 2022, Silicon Valley Bank and Signature Bank held $157 billion and $83 billion, respectively, in uninsured deposits. The implied subsidy, then, for the uninsured depositors bailed out on Sunday night is at least $3.0 billion.

But, this number is likely far too small. First, the deposit insurance fund is below the 1.35 percent statutory minimum and well below the 2.0 percent target set by the FDIC. At these rates, the value of the bailout increases to $3.2 billion (for the statutory minimum) and $4.8 billion (at the target rate).

Second, the announcement that the government would insure all depositors at these banks also implied that they would do the same for uninsured depositors at all other regulated banks. Silicon Valley Bank and Signature Bank were not too big or too interconnected to fail. Instead, the government feared that requiring uninsured depositors to wait to get access to their funds or to take a haircut on their deposits would lead to contagious runs by similarly situated uninsured depositors at other banks. If a different bank were to fail, then, regulators would fear the same risk of contagion, and uninsured depositors, as a result, should expect the same treatment.

As of December 2022, there are $7.7 trillion in uninsured deposits in the United States at FDIC-regulated banks. At the current reserve ratio, the implicit subsidy to these depositors is $98 billion. At the statutory minimum, the subsidy increases to $104 billion. At the target reserve ratio, the subsidy grows to $150 billion.

The problem with implicit guarantees is that, if the market believes that they exist, they become very hard to reverse. In the coming days, expect administration officials to argue that their actions this past weekend did not set a precedent. But, put yourself in the shoes of a commercial depositor with a large, uninsured account at a regional bank. Do you believe them?

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