Does the Biden Administration Have a Bank Bailout Policy?

Does the current administration maintain a proper bailout policy? The White House was unprepared for Silicon Valley Bank, Signature Bank, and First Republic collapses, as well as the market stress for small- and mid-size institutions. And it certainly shows. From President Joe Biden to Treasury Secretary Janet Yellen to Federal Reserve Chair Jerome Powell, nobody was ready for the concentrated meltdown in the banking system, despite the multiple warnings from central bank supervisors and regulators. Instead, as usual, all the president's men and women shifted blame to their predecessors, flip-flopped on positions, and panicked by throwing money at the problem in the hope that an unpopular president would avoid becoming even less popular. So, is there an official framework right now? Two months since the first failure, it seems there is not.

A Bank Bailout Flip Flop

In the days following the failures of Silicon Valley Bank and Signature Bank, Yellen appeared before the Senate Finance Committee to discuss the federal government's response to the banking turmoil. In an exchange with Republican lawmakers, Yellen initiated widespread consternation when she informed lawmakers that deposits over $250,000, which exceed the Federal Deposit Insurance Corporation (FDIC) limit, at a small bank would not be guaranteed unless the company threatened the financial system.

But the dismissal of smaller community banks generated sharp criticism.

Days later, at an American Bankers Association conference, Yellen proposed that depositors at smaller institutions could receive emergency assistance to prevent a potential contagion risk. However, she added that the measures the Federal Reserve, Treasury, and FDIC employed "were not focused on aiding specific banks or classes of banks."

Twenty-four hours later, Yellen told the Senate Appropriations subcommittee that the White House was not considering or discussing "anything having to do with blanket insurance or guarantees of all deposits." However, at the same hearing, Yellen revealed that the federal government could utilize these tools "again for an institution of any size if we judged its failure would pose a systemic risk."

Perhaps realizing the poor optics of bailing out the well-connected financial institutions rather than a community in the rural areas of Alabama or Oklahoma, Yellen and her colleagues had to shift course at the start of the banking crisis and convey the message that maybe the tinier entities should be tossed a lifeline from Uncle Sam.

Ultimately, the current administration does not have a firm bailout policy. Instead, Biden officials ostensibly lick their index finger, erect it in the air, and see where the political winds are headed. Thankfully, Yellen might not be tested again, as the banking crisis may have stabilized for now. In addition, the Eccles Building has become an endless money pit. The Fed’s lending facilities, including the Bank Term Funding Program, continue to surge as more entities tap the funds, according to the latest update to the Federal Reserve’s balance sheet.

Should Anyone Receive a Bailout?

The 2008-2009 bank bailout opened Pandora’s box, informing the Wall Street titans that the government would support operations if they ran into trouble. Instead of allowing these institutions to fail, taxpayers would be on the hook, or the Fed would be forced to launch stealth quantitative easing. Why bother being a responsible organization when it is almost guaranteed that officials and regulators would do their best to prevent a collapse of the banking system? These are the moral hazards. But while the large banks are promised bailouts when they run into trouble, the smaller alternatives are not offered the same level of assistance. However, from a political standpoint, Republicans and Democrats almost have to rescue a banking outfit in Middle America to avoid being seen as playing favorites with coastal elites.

Is it sound economics? Of course not; it’s political expedience.