Are the $230 billion Silicon Valley and Signature bank takeovers by FDIC crashing regional banks?

Americans for Limited Government President Rick Manning issued the following statement in response to President Joe Biden, U.S. Treasury, the Federal Reserve and the FDIC’s decision to bail out uninsured depositors in Silicon Valley Bank and Signature Bank and put the banks into FDIC receivership to the tune of $230 billion.

“The failure of SVB Bank and Signature Bank and their announced $230 billion bailout by the U.S. Treasury, Federal Reserve and FDIC should alert Congress to a power they ceded to the executive branch in the 2010 Dodd-Frank legislation. Under the law, Congress will not be asked to appropriate a single dollar and yet the $230 billion bailout’s costs will be paid by additional fees and higher interest rates on loans and credit cards on the American people.

“The scary and yet untold part of this story is that SVB Bank and Signature Bank are just a potential tip of the $20.8 trillion total deposit iceberg, including $1 trillion of uninsured deposits, that the federal government has implicitly just guaranteed in full in a bid to shore up the banking system. In fact, the easiest outcome to predict was that the share prices of small and regional banks would be pummeled—and they are now—as investors and depositors flee from otherwise solvent smaller banks.

“What’s the incentive to hold a stock of a regional bank that might be put into receivership? The decision by Treasury and the Fed put the two regional banks into receivership, under the law, and shareholders got nothing, making the investment in small banks much riskier. Meaning, you can sell your shares today in a regional bank, and get some percent of your investment, or wait for your receivership tomorrow, and you get nothing.

“Once again, this massive liability has been assumed without a current vote in Congress, based on the very predictable outcome of Congress writing itself out of the bank bailout process through creation of the authority for the executive branch to declare almost anything in the U.S. economy systemically risky. The possible good news is that Congress may now revisit Dodd-Frank in order to avert what could become a vicious cycle of ‘fail and bail.’

“Under the current law, with assessments on financial institutions with $50 billion or more of assets being the funding source, in addition to the Fed, the $230 billion bailout shockingly accounts for just 1.1 percent of all the $20.8 trillion deposits nationwide, including $1 trillion of uninsured deposits. These new assessments will put the country’s biggest banks under additional stress, with the potential of the weakest failing, creating a potential avalanche of future bank defaults. The Fed is immediately using a new credit window to deal with this problem, and no matter what happens, more than 95 percent of deposits appear to be guaranteed, but that’s also a part of the problem. Congress needs to reevaluate Dodd-Frank and investigate how SVB Bank and Signature Bank became underwater in the first place, so that an examination of any policies that might have contributed to the problem, including mandatory purchases of U.S. treasuries, played a role.”