FDIC's Systemic Risk Exception: A Lifeline in Times of Crisis

Strategic Insights -

The recent collapses of Silicon Valley Bank (SVB) and Signature Bank have sparked a heightened sense of urgency in the banking sector, prompting policymakers to invoke the FDIC's systemic risk exception. This provision, temporarily suspending the least-cost resolution requirement, allows the FDIC to provide exceptional support to banks in crisis, shielding uninsured depositors from potential losses. The FDIC's current projections indicate that the cost of resolving the two failed banks will be approximately $22.5 billion, while the estimated uninsured deposits at SVB and Signature Bank in 2022 stood at $231.1 billion.

Key Takeaways:

  • The FDIC's systemic risk exception is a critical tool for policymakers to respond to unprecedented banking crises, such as the collapse of SVB and Signature Bank.
  • The exception temporarily suspends the least-cost resolution requirement, enabling the FDIC to provide exceptional support to banks in crisis, shielding uninsured depositors from potential losses.
  • Since 1991, the FDIC has invoked the systemic risk exception on five occasions, including Wachovia, Citigroup, and the Temporary Liquidity Guarantee Program (TLGP).
  • The exception was designed to be used under specific conditions, including the determination that least-cost resolution would have "serious adverse effects on economic conditions or financial stability."
  • Policymakers must document their decision, undergo a review by the Government Accountability Office, and notify relevant congressional committees within three days.
  • The FDIC's use of the systemic risk exception raises concerns about moral hazard, too-big-to-fail banks, and the competitive disadvantage faced by smaller institutions.
  • The first use of the exception since its last amendment in 2010 raises questions about whether additional legislative changes are warranted to narrow policymakers' discretion.
  • Changes to bank regulation or deposit insurance could also impact the likelihood of utilizing the systemic risk exception.

Statistics:

  • Estimated uninsured deposits at SVB and Signature Bank in 2022: $231.1 billion
  • Current projections for the cost of resolving the two failed banks: $22.5 billion
  • Net income to the FDIC or the government from three previous uses of the exception: Citigroup, Bank of America, and the TLGP.
  • Number of planned uses of the systemic risk exception since 1991: five
  • Monetary compensation received by the government in the case of Citigroup: stock and warrants.

Sources:

  • Congressional Research Service, In Focus white paper, "FDIC's Systemic Risk Exception," April 11, 2023.
  • Congressional Research Service, Insight, "Silicon Valley Bank and Signature Bank Failures."
  • Congressional Research Service, In Focus, "Deposit Insurance and the Failures of Silicon Valley Bank and Signature Bank."
  • Congressional Research Service, In Focus, "Bank Failures and the FDIC."
  • Congressional Research Service, Report, "Costs of Government Interventions in Response to the Financial Crisis: A Retrospective."
  • Congressional Research Service, Report, "Introduction to Financial Services: Systemic Risk."
  • Dodd-Frank Act (P.L. 111-203).