How the FDIC Sourced Crisis-Time Fed Funding Through the Failed Banks of 2023

Much ado was made during the Banking Crisis of 2023 when the previously empty line item “Other Credit Extensions” became the largest lending category on the Federal Reserve’s balance sheet. The line item represented the Fed loans to banks that had subsequently been put into Federal Deposit Insurance Corporation (FDIC) receivership—inclusive of new lending to the failed banks that were temporarily reopened as FDIC-run bridge banks.

While the “ado” about these loans largely faded after they were paid off on November 30, 2023,  a recent speech by FDIC Vice Chair Travis Hill provided the first official discussion of this lending. Hill observed [emphasis added throughout]:

The failures of SVB and Signature (and subsequently, but to a lesser extent, First Republic) placed substantial liquidity demands on the FDIC. The FDIC initially met these demands through borrowings from the Federal Reserve and did not pay off the borrowings in full until nearly nine months later. The unprecedented nature of these borrowings, and the substantial cost incurred, have raised a number of questions.

Two things were particularly “unprecedented” about this funding mechanism.  As Vice Chair Hill noted, the FDIC did not immediately pay back the Fed upon the closing of the Silicon Valley Bank (SVB) and Signature Bank bridge banks or of First Republic Bank. The FDIC instead sold many of the assets collateralizing the Fed loans, swapping an FDIC corporate guarantee for the collateralization and keeping the Fed loans outstanding.

Second, and not discussed by Hill or elsewhere, the bridge banks’ extensive new discount window borrowings included uncollateralized borrowing. The FDIC made this “naked” borrowing possible by providing its corporate guarantee—backed by the full faith and credit of the United States—to the Fed as security.

The initial use of Fed liquidity for the bridge banks seems to have been driven by a desire to preserve liquidity in the face of uncertainty. Notwithstanding the other potential motivations for making expansive use of this funding—and the legal uncertainties around it (discussed below)—the FDIC had implemented a novel mechanism to supplement its liquidity in crises. However, the “substantial cost incurred” must also be considered, particularly when thinking about how this mechanism fits within the FDIC’s legal authorities.

What Happened?

When resolving a bank, the FDIC is normally legally required to choose the resolution option that results in the least cost to the Deposit Insurance Fund (DIF). The “systemic risk exception,” however, provides that if the Treasury secretary, in consultation with the president, and a supermajority of the FDIC and Fed boards agree that following the least-cost resolution requirement “would have serious adverse effects on economic conditions or financial stability,” the FDIC need not execute a least-cost resolution.

On March 12, 2023, the federal banking agencies jointly announced the invocation of the systemic risk exception. Thus, the FDIC was able to consider financial stability when resolving SVB and Signature and take pursuant actions that wouldn’t have presented the least cost to the DIF. (A least-cost resolution, in this case, would have involved imposing losses on uninsured depositors.) Also on March 12, the Fed invoked its Section 13(3) emergency liquidity provision authority and announced the Bank Term Funding Program (BTFP)—under which the Fed would lend to banks against the par value of their government securities.[1]

Additional FDIC announcements explained that the failed Silicon Valley Bank and Signature Bank would see all their uninsured deposits protected; all deposits would be transferred—along with the banks’ assets and some liabilities—to Silicon Valley Bridge Bank (SVBB) and Signature Bridge Bank (SBB). Following this announcement, the line item on the Fed’s weekly balance sheet called Other Credit Extensions suddenly shot up from zero:

Figure 1 – Discount window primary credit vs. “Other Credit Extensions” vs. the Bank Term Funding Program in 2023, weekly. Sources: Federal Reserve Board, FRED

The Fed added a footnote to its balance sheet saying[2] that Other Credit Extensions,

includes loans that were extended to depository institutions that were subsequently placed into Federal Deposit Insurance Corporation (FDIC) receivership, including depository institutions established by the FDIC. The Federal Reserve Banks' loans to these depository institutions are secured by pledged collateral and the FDIC provides repayment guarantees.

In a June 2023 notice[3] on this line item, the Fed further clarified,

In 2023, the Federal Reserve extended loans under its ordinary discount window lending authority (section 10B of the Federal Reserve Act), as well as, in one instance, under its emergency lending authority through the Bank Term Funding Program (BTFP) (established under section 13(3) of the Federal Reserve Act), to depository institutions that were later placed into FDIC receivership. Discount window loans were extended to Silicon Valley Bank, Signature Bank, and First Republic Bank, and BTFP loans were extended to First Republic Bank, in each case, before the depository institutions were placed into receivership.

However, banks have failed with outstanding discount window loans before, and such lending has never shown up as Other Credit Extensions. (See Box: A Brief History of “Other Credit Extensions.”) For instance, Washington Mutual (WaMu) failed in September 2008 with $3 billion of outstanding discount window borrowing.[4]

The June 2023 Fed notice added that Signature’s discount window loans were transferred to its bridge bank,[5] and that both SBB and SVBB then took on new discount window borrowings:

The Signature Bank discount window loans that were outstanding when the depository institution was placed into receivership were assumed by Signature Bridge Bank, N.A., an OCC-chartered insured depository institution. In addition, new 10B discount window loans were extended to Signature Bridge Bank, N.A. and Silicon Valley Bridge Bank, N.A., both OCC-chartered insured depository institutions that were eligible discount window borrowers under the Federal Reserve Act.

Moreover, the Fed added that the discount window loans (and, in the case of First Republic, the BTFP loans) remained outstanding and were not assumed by the failed/bridge banks’ acquirers, but were instead left behind in the FDIC receiverships of the failed banks:

Upon the two bridge depository institutions and First Republic Bank being placed into receivership, the discount window and BTFP loans were not assumed by the acquiring depository institutions. In each case, the outstanding discount window and BTFP loans are being repaid from the proceeds of the sales to the acquiring depository institutions, if any, and the recovery on the collateral that was left behind in the receivership, supported by the FDIC guarantees of repayment.

Despite the sales of these franchises within weeks of their initial failure—SBB on March 19, SVBB on March 26, and the immediate sale of First Republic to JPMorgan Chase on May 1 (in other words, without establishing a bridge bank)—this Other Credit Extensions category remained substantial until the end of November 2023.

The weekly data (see Figure 1) shows that Other Credit Extensions peaked at $228 billion on the first reporting date following the First Republic failure (May 3).

Where Does the FDIC Normally Get Its Money?

While FDIC obligations have the “full faith and credit” status of US Treasuries, the FDIC is not funded by congressional appropriation; it is funded primarily by the fees it assesses on the banking industry. The Deposit Insurance Fund (p. 30) ended 2022 with a balance $128 billion and 2023-Q1 with $116 billion.

The FDIC also has a $100 billion line of credit with the US Treasury and an additional $100 billion line with the Treasury’s Federal Financing Bank (which is also funded by the issuance of Treasury debt).[6] The FDIC can also borrow from the Federal Home Loan Banks (FHLBs) and from banks themselves. It has no specific statutory authority to borrow from the Fed. Total FDIC borrowing is subject to a formulaic, statutory cap:

Figure 2 – Screenshot from the FDIC’s 2023 Annual Report describing its Maximum Obligation Limitation (MOL). Source: FDIC

FDIC guarantees would apply towards this cap on an expected cost basis, rather than by the total nominal amount covered. (FDIC guarantees would not count against the national debt ceiling.)

FDIC funding during the GFC

The FDIC borrowed during its cleanup of the Savings & Loan Crisis of the 1980s and 1990s. Yet, when the DIF balance went negative during the Global Financial Crisis (GFC), the FDIC didn’t do any borrowing, in part because of Fed liquidity provision—from policies unrelated to the FDIC or the DIF.

As shown in Figure 3, the DIF balance went negative in 2009. The “balance,” however, adjusts for expected losses; it is not an accounting of the FDIC’s liquidity. In fact, the DIF stayed very liquid without any FDIC borrowing.

As Figure 3 shows, the FDIC imposed a small special assessment of $5.5 billion on banks in June 2009. However, it later increased its liquidity through an elegant mechanism: a prepayment from banks of their regular FDIC insurance premiums. In December 2009, it raised more than $45 billion by requiring banks to pay their normal quarterly payment, plus the next 12 quarters’ worth, so the DIF could stay liquid despite a temporarily negative balance: