Federal plan to save SVB depositors faces legal, logistical hurdles

Although Treasury Secretary Janet Yellen has promised that all depositors with the failing Silicon Valley Bank will have access to their funds and the cost of federal intervention in the financial system will not be passed on to U.S. taxpayers, existing law and finite resources raise questions as to whether she will be able to follow through on either pledge.

The twin failures of Silicon Valley Bank and Signature Bank on Friday and Sunday, respectively, have sent financial systems in the United States into disarray. Major indices in the stock market posted mixed closes on Monday, though the metrics have been skewed by the halt of trading for numerous bank stocks.

The Biden administration has blamed former President Donald Trump for the volatility while assuring depositors that the government would provide a backstop to maintain their access to their money in a bid to prevent large scale bank runs.

The key element of the White House plan, however, may be dead on arrival from a legal standpoint. Yellen has insisted that depositors will retain access to their funds, however, the Federal Deposit Insurance Corporation only guarantees deposits up to $250,000. This means that the agency should not be able to remunerate accounts with more money in them.

Moreover, the $250,000 cap is a figure Congress set, and at least one former Treasury official has insisted that Yellen lacks the legal authority to make such a promise and guarantee larger deposits.

Appearing on the John Solomon Reports podcast on Monday, former Assistant Treasury Secretary Monica Crowley described Yellen's plan as "illegal." 

"If you want to change the law and go above $250,000 as a guarantee, well, then you got to go to Congress and change that law," she said. "Now, maybe they will try to do that. Maybe Congress will go down that road, but I don't see that right now. So what they're doing is way beyond their purview."

Raising the guarantee limit would encourage further risky behavior from banks and only make a comparable collapse more likely, Crowley warned.

Entrepreneur and 2024 Republican presidential candidate Vivek Ramaswamy also criticized the plan on Monday. "If you want to raise the FDIC deposit insurance limit above $250k, then do it prospectively for *all* Americans," he said."

"Don't retroactively change rules on the fly after," he continued, "especially for SVB which itself lobbied for years for loose risk limits claiming it wasn't 'systemically important.'"

The second hurdle to backstopping depositors in a major failed bank is, of course, money. The FDIC indicated in its latest quarterly report that it held $128 billion in its reserve. 

Signature Bank and Silicon Valley Bank, however, have $88.6 billion and $175.4 billion in deposits, respectively. That conspicuous gap leaves it almost certain that the FDIC will come up short of covering the balances of every depositor.

President Joe Biden has insisted that necessary money will "come from the fees that banks pay into the deposit insurance" and that taxpayers won't bear the burden of the backstop. Many politicians and financial insiders have expressed skepticism of that claim in particular.

"Even if the FDIC comes in and they're going to cover the uninsured depositors above and beyond the $250,000 that is guaranteed under the FDIC rules and by the law," said Crowley, "well ... we're going to be the ones in the end covering it. First of all, we are the government. So it's taxpayer dollars that's going to go into this, and it's all because this bank acted recklessly and not focused on their core business, and the regulators — who also we pay their salaries — they weren't paying attention. And it's a complete outrage, and the American people are just so sick of working so hard, paying so much in taxes to cover these kinds of reckless behaviors."

"[Even though the administration is saying no bailout, it is going to be a bailout," Crowley insisted. "And you know who in the end is going to cover the costs for this? You and me, the average American who is very careful and responsible with our money, we're going to be the ones that are going to cover the costs for bailing out venture capitalists, and tech people for the most part."

Ohio Republican Sen. J.D. Vance echoed Crowley. "The idea this won't be borne by taxpayers is also a joke," he wrote Monday on Twitter. "The inflated fees at every regional bank will be paid by taxpaying small banks and their taxpaying consumers. Those inflated fees are not incidental: They're what's paying for the expanded FDIC insurance."

The federal plan specifically aims to guarantee depositor access to their accounts and does not offer a lifeline to existing equity holders in the failing banks. Should the backstop face legal scrutiny, however, those storing their funds in either bank could theoretically lose everything.

SVB and Signature have been favorites among startup companies, as well as larger firms such as streaming giant ROKU, which holds roughly $487 million of its cash at SVB, according to CNN.

Ben Whedon is an editor and reporter for Just the News. Follow him on Twitter.