A bank bailout is when the government steps in to save a struggling financial institution. This is done to make sure that the institution does not fail since that could have huge negative consequences for consumers. Some of these effects are unemployment and reduced access to credit.
Bank bailouts are controversial because they use taxpayer money to do them. Taxpayers frown on this to save institutions that might not help them. There should be other ways to save institutions than using taxpayer money.
Bank Bailout Vs. Bank Failures
If a lender fails, there can be a direct effect on depositors. This happens because it can become insolvent which means that the institution is in debt to the depositors. Failed banks are often forced to close, leaving depositors at risk of losing assets. The FDIC will then step in to make sure that this does not happen.
Sometimes other institutions will step in and take over a failing institution. This causes fewer issues because the new lender will take over all the assets and liabilities. This means that there is less of an economic impact because existing accounts and employees are picked up by the new institution.
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Examples of Bank Bailouts
1974: Franklin National Bank
In 1974, Franklin National Bank had massive losses that equaled $64 million in just five months. The US government stepped in to provide $1.75 billion to prevent the institution from failing:https://time.com/3479314/franklin-national-bank/. The efforts failed and the bank collapsed a few months later. It was then taken over by the European-American Bank and Trust.
1984: Continental Illinois National Bank and Trust Company
This lender failed in 1984 due to risky lending practices. Rumors of a lender failure caused a bank run earlier in the year. A large portion of people – depositors and lenders – withdrew their funds and then cut ties with the lender. This put Continental in more debt.
The FDIC, or Federal Deposit Insurance Corporation, the Federal Reserve, and the Office of the Comptroller of the Currency bailed them out. Learn more about the FDIC here. Altogether, they provided $2 billion to bail the lender out. The FDIC guaranteed depositor funds and then purchased the bad loans that totaled $4.5 billion.
Citigroup was a part of the financial crisis of 2008. They were in imminent danger of collapse when the Troubled Assets Relief Program, or TARP, authorized the US government to send $45 billion to the ailing institution. TARP bailouts were an effort to stabilize the lending market and to prevent a bigger economic breakdown.
2009: Bank of America
In 2009, Bank of America acquired a troubled lender called Countrywide Financial. This, along with exposure to risky mortgage-backed securities led to severe financial difficulties for the mega institution. The government stepped in and provided assistance through TARP in the amount of $45 billion.
BOA was later ordered to pay $16.65 billion to the government because of fraud that led up to its financial crisis. This settlement included nearly $10 billion so they could resolve civil claims. It also included $7 billion to help the consumers who were affected by the practices of BOA, Merril Lynch, and Countrywide Financial Corporation that were deemed unlawful.
Have There Been Any Bailouts in 2023?
There have not been any bailouts yet, but there have been many failures in the industry. One major institution that failed was the Silicon Valley Bank. Others were Signature Bank and First Republic Bank.
These institutions failed due to many reasons including bank runs, hikes in federal interest, and risky management practices. SVB was the largest lender failure in US history. Although it technically was not a bailout, the FDIC did step in to protect consumer deposits.
Why is Bailout a Dirty Word?
This became a dirty word when lenders and auto executives were not affected by the financial troubles that affected their customers. In fact, these executives used corporate jets to fly to Washington to beg for money to save their financial institutions. Critics felt that they could use some of this type of money to bail themselves out.
What Has Happened Elsewhere?
The Swiss government pledged about $230 million to build up the Credit Suisse Group AG. They also used this money to help to sell the institution to UBS Group AG. Although there is still a question of this being a bailout, many experts say that it was.
What Will the Latest Rescues Cost?
We might not know the answer to this question for many years. The rescues that happened in 2008-2009 might be a clue to this. The government has spent more than $600 billion on these rescues, but they also made a profit of about $100 billion on the assets that they took over.
The FDIC’s deposit insurance has fallen below what is legally required. This happened after the collapse of SVB and Signature. The FDIC says that they can get $500 million from the purchase of the assets from those two institutions. The FDIC also says that they will get money from the institutions but that it will affect the customers.
What are the Risks of These Interventions?
Although the FDIC insures each institution for up to $250,000 for each customer, they did more than this for Signature and SVB. This is because most accounts were worth more than that and they wanted to help everyone. This did not sit well with critics because it could set a precedent for other lender failures.
The $250,000 limit was set up the way that it was because they wanted to encourage depositors to spread their wealth around to many institutions and not just one. People fear that the exceptions that were made for Signature and SVB would mean that they would be made for other institutions and that taxpayers would end up funding them.
Bank bailouts do not just affect the institutions, they also affect taxpayers. This is because the taxpayers are the ones who are ultimately paying for them. This does not sit well with them because they do not want to pay the added taxes.
Although people feel that there have been many bailouts, there have not been that many. Most of the lender failures have not been regarded as bailouts because the FDIC has been paying to shore the banks up. This does not help the feelings of consumers because they still feel that the government is giving them money to prevent them from failing.
The US is not the only country that has had bank bailouts and the most notable was the Swiss government who bailed out some of their institutions to the amount of $250 billion. There have been other countries that have had to deal with this, as well.