What is the practical difference between a government bailout vs. the FDIC being made to keep all depositors whole, even over the normal insured $250k limit?
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Government bailout: money goes to the financial entity in question directly, to keep the financial entity alive, i.e. the bank does not go bankrupt but is saved by the government.
FDIC Insurance: The bank does go bankrupt. All the people who had money at that bank however do still get their money back, up to the insured limit of 250K, or even more if such a decision were taken.
Government bailout: money goes to the financial entity in question directly, to keep the financial entity alive, i.e. the bank does not go bankrupt but is saved by the government.
FDIC Insurance: The bank does go bankrupt. All the people who had money at that bank however do still get their money back, up to the insured limit of 250K, or even more if such a decision were taken.
Government bailout: money goes to the financial entity in question directly, to keep the financial entity alive, i.e. the bank does not go bankrupt but is saved by the government.
FDIC Insurance: The bank does go bankrupt. All the people who had money at that bank however do still get their money back, up to the insured limit of 250K, or even more if such a decision were taken.
Well the term “bailout” has to be defined. In 2008, the bailouts were essentially emergency loans made by the government in exchange for assets of the company. These loans were (mostly) eventually paid back with a profit to the government.
The FDIC is funded by banks. It is not known in detail how this might happen but it is likely that the FDIC will have to increase the premiums charged to the banks to cover this unforeseen amount. Or they might come up with a different mechanism altogether (although unlikely given that the FDIC operates as an insurance scheme and does not have any alternative funding source)
In terms of the risk shifting, it is conceptually quite different. A bailout by the government necessarily entails that the government has accepted some risk – the companies lent the money might not be able to repay it and their assets might go down in value. If that happens, then it is taxpayer money that is lost.
The FDIC change is shifting risk to the FDIC which is not funded by the government so the risk and costs shift to the other banks who have to pay into the FDIC.
Well the term “bailout” has to be defined. In 2008, the bailouts were essentially emergency loans made by the government in exchange for assets of the company. These loans were (mostly) eventually paid back with a profit to the government.
The FDIC is funded by banks. It is not known in detail how this might happen but it is likely that the FDIC will have to increase the premiums charged to the banks to cover this unforeseen amount. Or they might come up with a different mechanism altogether (although unlikely given that the FDIC operates as an insurance scheme and does not have any alternative funding source)
In terms of the risk shifting, it is conceptually quite different. A bailout by the government necessarily entails that the government has accepted some risk – the companies lent the money might not be able to repay it and their assets might go down in value. If that happens, then it is taxpayer money that is lost.
The FDIC change is shifting risk to the FDIC which is not funded by the government so the risk and costs shift to the other banks who have to pay into the FDIC.
Well the term “bailout” has to be defined. In 2008, the bailouts were essentially emergency loans made by the government in exchange for assets of the company. These loans were (mostly) eventually paid back with a profit to the government.
The FDIC is funded by banks. It is not known in detail how this might happen but it is likely that the FDIC will have to increase the premiums charged to the banks to cover this unforeseen amount. Or they might come up with a different mechanism altogether (although unlikely given that the FDIC operates as an insurance scheme and does not have any alternative funding source)
In terms of the risk shifting, it is conceptually quite different. A bailout by the government necessarily entails that the government has accepted some risk – the companies lent the money might not be able to repay it and their assets might go down in value. If that happens, then it is taxpayer money that is lost.
The FDIC change is shifting risk to the FDIC which is not funded by the government so the risk and costs shift to the other banks who have to pay into the FDIC.
Bailout – government provides funds to keep the bank afloat because it doesn’t have enough assets to cover it’s deposits
The two the FDIC are currently covering actually have enough assets to cover their liabilities, they just don’t have enough *liquid* assets to cover an immediate bank run. Government is just providing access to cash while the longer term bonds mature, but in the end the government doesn’t spend any real money, it just trades cash reserves for assets
Bailout – government provides funds to keep the bank afloat because it doesn’t have enough assets to cover it’s deposits
The two the FDIC are currently covering actually have enough assets to cover their liabilities, they just don’t have enough *liquid* assets to cover an immediate bank run. Government is just providing access to cash while the longer term bonds mature, but in the end the government doesn’t spend any real money, it just trades cash reserves for assets
Bailout – government provides funds to keep the bank afloat because it doesn’t have enough assets to cover it’s deposits
The two the FDIC are currently covering actually have enough assets to cover their liabilities, they just don’t have enough *liquid* assets to cover an immediate bank run. Government is just providing access to cash while the longer term bonds mature, but in the end the government doesn’t spend any real money, it just trades cash reserves for assets
One bails out the bank, therefore keeping the bank “in business” and ensuring the customers have the money they’ve deposited. The other bails out the bank’s customers but leaves the bank, well, bankrupt. The last several times the government has bailed out the banks they immediately turned around and loaned more money out, using it as a way to make more money instead of propping up their assets. That has a lot to do with why there were any bailouts this time around.
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