Why It Matters

A new Congressional Research Service report on the FDIC's systemic risk exception has laid bare a central tension in how the government responds to banking crises: the tool was designed to resolve failing banks, but policymakers have repeatedly deployed it to prop up healthy ones. The 2023 failures of Silicon Valley Bank and Signature Bank have renewed focus on this authority, which allows the Treasury Secretary to guarantee deposits beyond the standard $250,000 insurance limit when least-cost resolution would threaten financial stability.

The Big Picture

The systemic risk exception has been invoked six times. Cases in 2008 reveal a pattern of mission creep.

When Wachovia faced imminent failure, the FDIC initially accepted Citigroup's offer to acquire it under a deal that would have required a $312 billion partial asset guarantee. The FDIC subsequently rejected that offer in favor of a competing bid from Wells Fargo that required no FDIC assistance. For Citigroup itself, policymakers decided to provide an assistance package involving the Federal Reserve, the FDIC, and the Troubled Asset Relief Program, using the systemic risk exception to provide a $306 billion partial asset guarantee. Bank of America received a $118 billion partial asset guarantee offer, which was never finalized. Bank of America paid the government a termination fee to cancel the guarantee when financial market conditions stabilized.

Congress reformed how the FDIC resolves banks in 1991 through P.L. 102-242, which introduced prompt corrective action and least-cost resolution requirements as cornerstones of resolution. Although the systemic risk exception was clearly intended to be a bank resolution tool, policymakers used the authority to justify two crisis programs that were open to all banks, including healthy ones.

In 2010, the Dodd-Frank Act limited the systemic risk exception to receiverships to rule out its future use for broadly based programs. The Dodd-Frank Act provided separate authority for future debt guarantee programs and temporary authority for a TAG program that was not renewed when it expired.

Policymakers were concerned that a run by uninsured depositors at SVB and Signature would spread to other banks, causing a broader financial crisis. The FDIC guaranteed uninsured deposits at both banks under the statutory systemic risk exception to least-cost resolution. The two banks' combined estimated uninsured deposits were $231.1 billion in 2022. The FDIC estimates it absorbed losses of $16.7 billion from the SVB and Signature Bank intervention that would have otherwise been borne by uninsured depositors.

Political Stakes

The cost structure of the 2023 intervention has created immediate political friction. Any loss to the FDIC from invoking the systemic risk exception must be repaid through a special assessment on banks. The FDIC levied an assessment on the 110 banks with over $5 billion in uninsured deposits to replenish the Deposit Insurance Fund. This mechanism shifted costs to other banks after the fact, specifically the 110 banks with over $5 billion in uninsured deposits.

The Treasury Secretary must document the decision to invoke the systemic risk exception, and Congress must be notified within three days when it is invoked. The Government Accountability Office must review incidents where the systemic risk exception is invoked. Section 905 of P.L. 119-101 requires a failed bank's regulator to report to Congress on its supervision of the bank, and expands the scope of review by the Government Accountability Office when the systemic risk exception is invoked.

Unlike with Wachovia and Citigroup, the systemic risk exception was invoked for Bank of America in anticipation of market pressure rather than in response to imminent failure. In the case of SVB and Signature, the banks and their leadership and shareholders were not bailed out, as the banks were closed, but uninsured depositors were. Congress set a deposit insurance limit in part because there is an expectation that depositors above the limit should be financially sophisticated enough to monitor their banks' riskiness.

The Federal Reserve created a new emergency program following the failures of SVB and Signature.

The Bottom Line

Of the six cases where the systemic risk exception was invoked, only the Transaction Account Guarantee program and the SVB/Signature intervention resulted in losses to the FDIC. Assistance to Citigroup, Bank of America, and the Debt Guarantee Program resulted in positive net income to the FDIC or the government as a whole. In the cases of Wachovia, Bank of America, and the Public Private Investment Program, the proposed action never occurred.

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