The government’s response to the failure of two major banks has already cost hundreds of billions of dollars. Will ordinary Americans end up paying for it somehow? And what will the price tag be?

It may take months for the answers to be fully known. The Biden administration said it will guarantee uninsured deposits at both banks. The Federal Reserve has announced a new loan program for all banks that had to borrow money to pay for withdrawals.

On Thursday, the Fed gave its first glimpse of the magnitude of the response, saying banks had borrowed about $300 billion in emergency funding over the past week, nearly half of which went to holding companies for the two failing banks to pay depositors. The Fed did not say how much other banks have borrowed money, adding that it expects the loans to be repaid.

The goal is to avoid a deepening panic where customers rush to raise so much money that even healthy banks collapse. That scenario would disrupt the entire financial system and risk derailing the economy.

Taxpayers are unlikely to bear any direct costs for the bankruptcy of Silicon Valley Bank and Signature Bank. But other banks may need to help cover the cost of covering uninsured deposits. Over time, those banks could pass higher costs on to customers, forcing everyone to pay more for services.

Here are some questions and answers about the cost of bank collapse:

Everything you need to know about the spectacular collapse of the Silicon Valley Bank How is the response paid?

Most of the costs of underwriting all deposits with both banks will likely be covered by the proceeds from the Federal Deposit Insurance Corp. receives from the liquidation of the two banks, either by selling them to other financial institutions or by auctioning their assets.

Any fees beyond that would be paid from the FDIC’s Deposit Insurance Fund, which is typically used in the event that a bank fails to reimburse depositors up to $250,000 per account. The fund is maintained with fees paid by participating banks.

Both Silicon Valley and Signature banks had a remarkably high share of deposits above that amount: 94% of Silicon Valley deposits were uninsured, as were 90% of Signature deposits. The average figure for large banks is about half that level.

If necessary, the insurance fund will be supplemented by a special assessment of banks, the FDIC, Fed and Treasury said in a joint statement. While the cost of that assessment may ultimately be borne by bank customers, it’s not clear how much money would be involved.

Kathryn Judge, a professor of law at Columbia University, said greater costs to consumers and the economy could result from potentially major changes to the financial system resulting from this episode.

If all customer deposits were considered government-guaranteed, whether formally or informally, then regulations would need to be tightened to prevent bank failures or reduce the cost if they do happen. Banks may have to pay permanently increased fees to the FDIC.

It will require us to rethink the entire banking regulatory framework,” Judge said. That is much more important than the modest fees that other banks will pay.

Biden Calls for Tougher Penalties for Failing Bank Directors Will Taxpayers Get Hooked?

President

joe

Biden has insisted that no taxpayer money will be used to resolve the crisis. The White House is doing everything it can to avoid the impression that the average American is bailing out the two banks in a manner akin to the highly unpopular bailouts of the largest banks.

financial

companies during the 2008 financial crisis.

No losses related to the Silicon Valley Bank resolution will be borne by taxpayers, read the joint statement from the Treasury, the Fed and the FDIC.

Treasury Secretary Janet Yellen defended that position Thursday amid heavy questioning from GOP lawmakers.

The Fed’s loan program to help banks pay depositors is backed by $25 billion in tax dollars that would cover any losses on the loans. But the Fed says it’s unlikely the money will be needed because the loans are backed by government bonds and other safe securities as collateral.

Even if taxpayers aren’t affected directly, some economists say the banks’ customers could still benefit from government support.

To say the taxpayer won’t pay anything ignores the fact that offering insurance to someone who hasn’t paid for insurance is a gift, said Anil Kashyap, an economics professor at the University of Chicago. And that’s kind of what happened.

Column: The collapse of the Silicon Valley Bank is Silicon Valley’s problem, not yours. Is this a rescue operation?

Biden and other Democrats in Washington deny that their actions amount to a bailout of any kind.

It’s not a bailout like what happened in 2008, Sen. Richard Blumenthal (D-Conn.) said this week as he proposed legislation to tighten banking regulation. It’s basically a protection for depositors and a preventative measure to stop a run on other banks across the country.”

Biden has stressed that the banks’ managers will be fired and their investors will not be protected. Both banks will cease to exist. During the 2008 crisis, some financial institutions that received government financial assistance

search like

the insurer AIG, were saved from almost certain bankruptcy.

Still, many economists say Silicon Valley Bank depositors, including wealthy venture capitalists and tech startups, still receive government support.

Why is it sensitive capitalism for someone to take a risk, and then be protected from that risk if that risk actually materializes? asked Raghuram Rajan, a finance professor at the University of Chicago and former head of India’s central bank. It’s probably good for the short term in the sense that you don’t have widespread panic. … But it is problematic for the system in the long run.”

Many Republicans on Capitol Hill argue that smaller community banks and their customers will bear some of the costs.

Banks in rural Oklahoma “are about to pay a special fee to bail out millionaires in San Francisco,” Sen. James Lankford (R-Okla.) said on the Senate floor.

Rugaber writes for the Associated Press. Associated Press writer Fatima Hussein and video journalist Rick Gentilo contributed to this report.