What Does FDIC Actually Do?

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Over the last week the usual suspects are outraged that the FDIC is going to make whole all the depositors at failed Silicon Valley Bank, including balances over the insured limit of $250,000.

Maybe I am naive, but I thought that was what FDIC always does. For instance, if you look at FDIC’s heroic operations during the Crash of 2008, it seems that almost every failed bank was taken over by another bank that assumed all its deposits. At the beginning of the year there were a few failures where a failed bank was taken over by another bank that “agreed to assume the insured deposits,” but when the rubber hit the road in September with the Lehman Brothers failure (don’t forget that Lehman Brothers was not a deposit bank), almost all the acquiring banks “assumed all deposits.” Now, I don’t now what transpired between the failures and the acquisitions, but I have always assumed that the acquiring bank got a nice sweetener from FDIC, “nod, nod, wink, wink, know what I mean.”

Because? Because the fundamental government role in a credit meltdown is to be the “lender of last resort” as in Walter Bagehot’s Lombard Street. The business about insured deposits is just the government trying to talk bubba language and getting depositors to feel that their money is “safe.” Anyone can see that the voters absolutely hate to see their money bailing out failed greedy bankers, so the government throws a blanket over the whole operation, talking about insurance and small depositors, but actually cleans up a failed bank’s balance sheet in the process of transferring the failed bank to the acquiring bank.

So I assume that the government cunningly obscures what the FDIC actually does in a bank failure. It has the advertised feature of insuring the small depositors. But what it really does is throw some money into the pot while baby-sitting the sale of a failed bank to a healthy bank. My guess is actually that this is much cheaper than closing the failed bank down and paying off the insured depositors with the remaining assets of the bank, because once you have closed the failed bank there is probably not much left.

The problem with the Silicon Valley Bank was that the Biden administration inadvertently told us what it actually did.

But try explaining that to a voter. Or a politician. Or a journalist. Or the women on The View.

UPDATE: Of course, if a bank is an SIB — as in Globally Systemically Important Bank — then the whole FDIC thing doesn’t matter anyway.