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16.06 – Debt ceiling standing in the way of bank rescue?

By Anne Sandager (Political Analyst)

Little has been written about how the debt ceiling plays into the U.S governments’ new rescue plans for failing banks. These include the federal guarantee on uninsured depositors in SVB under the expanded FDIC and the new Bank Term Funding Program (BTFP): an uber-generous version of the federal ‘discount window’ borrowing scheme which is put in place to help struggling banks “meet the needs of all their depositors” (italics added).

FDIC and BTFP are federal programs, so wouldn’t any additional debt-funding to these initiatives count against the federal debt ceiling? 

The short answer is NO. 

The Biden administration has circumvented the FDIC’s legally authorized funding sources which are The Deposit Insurance Fund and, secondly, The U.S Treasury. Instead the government has gotten the Federal Reserve to lend $143 billion to fund the FDIC rescue mission of SVB. Because the Fed is formally independent of the federal government, debt issued by the Fed is not restricted by the federal debt ceiling despite FDIC borrowing clearly being U.S. government debt.

BTFP is also facilitated by the Fed, and as such doesn’t constitute federal lending. That being said, loans will be backstopped by $25 billion from the Exchange Stabilization Fund (ESF) – one of the Treasury’s multi-purpose emergency funds. While the fund was initially created in 1934 to stabilize the dollar, it has since been used to do everything from save the Mexican government from default, depositor insurance during the 2008-09 crisis, and Covid-19 relief packages. Historically, borrowing via the ESF has been a net-gain for the U.S government through fees and interest rates. 

BOTTOM LINE:

For now, Biden need not worry about the debt ceiling when extending a credit line to struggling banks as the Fed can easily issue debt on his behalf.

In fact, Biden could use the fear of a looming banking crisis to his advantage. There are good arguments to be made that Republicans should agree to a ‘clean bill’ on raising the debt ceiling as fast as possible to avoid further jeopardizing confidence in the U.S economy, which (worst-case) could lead to even higher borrowing costs for the Fed and subsequently put commercial banks under even more pressure.