Bank Failures and the FDIC

Bank Failures and the FDIC

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Updated March 23, 2023
Bank Failures and the FDIC
This In Focus provides an introduction to the Federal
and $89 billion in deposits when it failed. The number of
Deposit Insurance Corporation’s (FDIC’s) process for
problem banks as of Q3 2022 was 39, with combined assets
resolving failing FDIC-insured banks. It also identifies
of $47.5 billion.
policy issues Congress may consider related to the recent
failures of two large banks in 2023—Silicon Valley Bank
Deposit Insurance Fund (DIF). Deposit insurance
(SVB) and Signature Bank (SB).
guarantees repayments of deposits at a bank up to the
statutory insured limit, $250,000. It is intended to protect
Overview of Bank Failures
depositors, prevent bank runs, and reduce the risk of
Banks fail for many reasons, although most trace back to
systemic failure of the banking system. Banks pay deposit
the management of bank resources, resulting in a bank’s
insurance premiums to the FDIC, which maintains the DIF
inability to meet liquidity or capital requirements. Liquidity
to meet its obligations of insuring deposits and resolving
is the ability of a bank to meet cash flow needs, including
failed banks. Since the start of federal deposit insurance in
deposit withdrawals by its customers. Capital (equity) is the
1934, all depositors have been made whole up to their
difference between assets and liabilities. A bank’s capital
insured limits after bank failures.
helps absorb losses on loans, securities purchased by the
bank, and other assets while the bank remains solvent.
Table 1. Bank Failures 2001-2023
When a bank’s capital situation deteriorates such that it
Bank
Assets
Deposits
fails to meet minimum regulatory standards, the bank’s

Failures
(in billions)
(in billions)
primary federal regulator is required to take prompt
corrective action (PCA). Regulators typically issue a PCA
2001-2020
561
$721
$522
letter advising the bank on specific actions it must take to
restore itself to financial health. When a critically
2021-2023
2
$319
$264
undercapitalized bank fails to meet PCA requirements, its
Source: CRS with data from FDIC, Bank Failures in Brief.
chartering agency will typically close the bank. By law, the
Notes: As of March 22, 2023.
FDIC is appointed receiver.
The FDIC deposit insurance is backed by the full faith and
Bank Failures, 2001-2020. There were 561 bank failures
credit of the United States through a line of credit with the
between 2001 and 2020 (see Table 1). The failed banks
U.S. Treasury. While the DIF was funded to its statutory
collectively held $721 billion in assets and $522 billion in
limit before the last financial crisis, bank failures rapidly
deposits. In nominal dollars, the largest bank failure in U.S.
depleted it during the crisis. The DIF balance was at its
history was Washington Mutual Bank in 2008 with $307
lowest at the end of 2009 with a negative balance of $20.9
billion in assets and $188 billion in deposits. Most
billion. Through regular bank assessments the FDIC has
depository institutions that failed were relatively small
increased the DIF to $128.2 billion as of December 2022.
banks, with a large majority having less than $1 billion in
The fund has remained largely self-financed with some
deposits. Not all banks fail after becoming distressed—the
borrowings from the Treasury. As of year-end 2022, the
number of problem banks identified by the bank regulators
FDIC insured deposits of nearly $10 trillion at 4,715 banks.
reached a high of 884, representing $390 billion in assets at
Total deposits at the end of 2022 were over $19 trillion—
the end of 2010.
with FDIC insuring nearly 50% of all deposits.
Overview of the Resolution Process
In response to the bank failures between 2007 and 2010 and
the related financial crisis, the Dodd-Frank Wall Street and
As receiver of a failed bank, the FDIC evaluates all possible
Consumer Protection Act in 2010 (P.L. 111-203) was
resolution alternatives and selects the one that is least costly
enacted to reform the financial regulatory system. The act
to the DIF, per statute, unless the systemic risk exception
permanently increased the deposit insurance limit from
(described below) is invoked. Typically, uninsured
$100,000 to $250,000. Subsequently, in 2018, the
depositors, creditors, and shareholders are not protected
Economic Growth, Regulatory Relief, and Consumer
against losses in order to meet the least cost requirement.
Protection Act (P.L. 115-174) was enacted, providing banks
The FDIC normally uses two main resolution methods: (1)
regulatory relief from certain requirements.
purchase and assumption transactions and (2) deposit
payoffs. Another method, bridge banks, is a type of
Bank Failures, 2021-2023. There were no bank failures in
resolution method the FDIC has used on a limited basis to
2021 or 2022. The two bank failures in 2023—SVB and
resolve large or complex failing banks.
SB—collectively held $319 billion in assets and $264
billion in deposits (see Table 1). The second-largest bank
Purchase and Assumption Agreement (P&A). The most
failure in U.S. history was SVB, with $209 billion in assets
commonly used resolution method is the P&A with an
and $175 billion in deposits. SB had $110 billion in assets
acquirer. The FDIC seeks bids from qualified bidders for
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Bank Failures and the FDIC
the failed bank’s assets and the assumption of deposits and
Initially, the uninsured depositors would have been issued
accepts the bid that is judged least costly to the DIF.
receivership certificates for the remaining balance of their
deposits. Eventually, the uninsured depositors would have
Bridge Banks. In a bridge bank P&A, the FDIC initially
received dividends in different tranches as compensation
acts as the acquirer and receiver until the bank is marketed
when the FDIC sold the bank’s assets. Subsequently, the
to external parties. The FDIC may establish a bridge bank
FDIC transferred all deposits and substantially all assets of
to resolve a large or complex failing bank in which more
the Deposit Insurance National Bank of Santa Clara to
time is needed to find a buyer. By law, a bridge bank is
Silicon Valley Bridge Bank, N.A. Likewise, the FDIC
initially chartered for two years, with optional one-year
created a bridge bank for SB, transferring all deposits and
extensions for three more years. The FDIC used bridge
substantially all assets to Signature Bridge Bank, N.A.
banks on a limited basis during the last financial crisis.
On Sunday, March 12—with the failure of SB—the FDIC,
Deposit Payoffs. If no viable P&A acquiring institution
Federal Reserve, and Treasury Secretary, after consultation
(AI) can be found, then the FDIC typically deploys a
with the President, determined that systemic risk existed
deposit payoff. In a deposit payoff, the FDIC ensures that
that could potentially have adverse economic conditions or
the customers of the failed institution receive the full
affect financial stability and decided to guarantee uninsured
amount of their insured deposits. The FDIC retains the
deposits under the systemic risk exception to least cost
assets of the failed institution in its capacity as receiver.
resolution—enacted in the Federal Deposit Insurance
The assets are eventually sold to maximize the recoveries to
Corporation Improvement Act of 1991 (P.L. 102-242).
the DIF, uninsured depositors, creditors, and owners.
Deposit Insurance. There has been much discussion
Deposit Insurance National Bank (DINB). If there are no
surrounding how deposit insurance should be used in the
viable AIs and the FDIC determines that a deposit payoff
event of additional bank failures. One policy question is
would be disruptive to the community and financial
whether Congress should give all deposits in the United
markets, then the FDIC might use a DINB to resolve a
States insurance coverage or whether it should be limited.
failed bank. In a DINB, the FDIC establishes a new national
Another issue widely discussed surrounds whether failing
bank with a charter from the Office of the Comptroller of
banks of smaller size, including community banks, will be
the Currency. By law, a DINB charter can be as long as two
temporarily provided the systemic risk exception to provide
years, with optional one-year extensions for three more
guarantee of all deposits.
years, but in practice the FDIC typically charters a DINB
with limited life and surrenders the charter within a few
Monitoring and Examination of Problem Banks. The
weeks. A DINB resolution allows failed-bank customers a
total number of problem banks and their collective assets is
brief period to move their deposits to other banks. The bank
regularly published in the Quarterly Banking Profile (QBP)
has no capitalization requirements. The FDIC retains all of
by the FDIC. When FDIC published its latest QBP in 2023,
the assets in its capacity as the receiver to eventually sell
based on Q3 2022 information, it reported 39 problem
them.
banks with collective assets of $47.5 billion. Based on the
amount of assets reported at the end of September 2022,
Loss Sharing Agreements. While the FDIC can enter into
bank regulators did not consider SVB and SB problem
loss sharing agreements whenever it sells the assets of a
banks. This was also the case when Washington Mutual
failed bank to minimize the cost to the DIF, it has often
Bank failed in September 2008.
been used with P&A transactions. Based on the P&A, the
Arguably, the issues surrounding the bank failures in 2023
AI may purchase a majority, if not all, of the assets and
evolved quickly, but some of the underlying issues existed
assume all or some of the deposits and certain other
even five years ago. In a report published by the Financial
liabilities of the failed bank or from a bridge bank. With
Stability Oversight Council in 2018, among medium-size
loss sharing agreements, the FDIC agrees to absorb a
banks, SVB had the highest percentage of uninsured
portion of the losses on the sale or the write-downs on the
deposits at nearly 80%. It had nearly $44 billion in total
value of loans.
deposits in March 2018, and the deposits grew to $175
Recent Failures and Policy Issues
billion by March 2023—nearly a fourfold increase.
The California Department of Financial Protection and
As a consequence of these recent failures, questions have
Innovation closed SVB on the morning of Friday, March
arisen surrounding the large bank regulatory regime created
10. The New York State Department of Financial Services
in the first two decades of this century and how they should
closed SB on Sunday, March 12. Typically, banks are
be tailored to address the systemic risks posed by medium-
closed on Friday evenings. During the last financial crisis,
size banks, not just the largest banks.
most of the failed banks were purchased by an AI; neither
SVB nor SB initially had AIs.
For more information, see CRS Insight IN12125, Silicon
Valley Bank and Signature Bank Failures, by Andrew P.
Arguably, the banking regulators did not anticipate the
Scott and Marc Labonte; and CRS In Focus IF10035,
speed at which the conditions at these banks would
Introduction to Financial Services: Banking, by Raj
deteriorate or the potential systemic issues. When SVB was
Gnanarajah and Andrew P. Scott.
closed, the FDIC initially created the Deposit Insurance
National Bank of Santa Clara. It would have paid each
Raj Gnanarajah, Analyst in Financial Economics
depositor that qualified up to the insured limit of $250,000.
IF10055
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Bank Failures and the FDIC

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