CRS Identifies Policy Issues following Invocation of Systemic Risk Exception for SVB/Signature Bank

Steven Lofchie Commentary by Steven Lofchie

The Congressional Research Service ("CRS") highlighted policy issues implicated by the FDIC’s guarantee of uninsured deposits of Silicon Valley Bank ("SVB") and Signature Bank under the systemic risk exception to least-cost resolution requirement.

In an In Focus report, CRS explained that when a bank fails, the FDIC generally must resolve the bank using the least-cost resolution which is intended to resolve the bank as "quickly and inexpensively as possible." When a bank failure poses a systemic risk that threatens financial stability, banking regulators may choose to invoke the systemic risk exception. CRS stated that the systemic risk exception "is a recognition by Congress that financial stability concerns sometimes trump the desire to minimize potential costs to the taxpayer." CRS said that in the case of SVB and Signature Bank, Treasury, the FDIC and the Federal Reserve Board invoked the systemic risk exception to contain a potential run by uninsured depositors that could spread to other banks and the broader economy.

CRS highlighted policy issues implicated by invoking the systemic risk exception. These include:

  • added costs of resolution to the government;
  • "moral hazard," (meaning that when "individuals or businesses are protected from losses they will act more recklessly");
  • added financial burden on banks that did not fail; and
  • competitive disadvantage to small banks if uninsured depositors believe that their deposits are safer at banks that are "too big to fail."


The moral hazard concern is significant. As the CRS report noted: 'the use of the systemic risk exception at two institutions that few previously believed were 'too big to fail'" raises many questions. What are the rules to be going forward? Regulators can attempt whatever theoretical arguments they wish as to the risks to financial stability, but, at the end of the day, the banking regulators made a choice to save certain politically connected depositors of a bank situated in a politically important state. Would it be remotely fair for the bank regulators now to allow a small bank in a flyover state to fail - particularly as the depositors at that small flyover bank will now be indirectly charged higher deposit insurance rates to save the depositors of SVB and Signature?  

Email me about this

Premium Content

Available only to Premium subscribers.