No Guarantee Systemic Risk Exception Will Save The Next Bank

Introduction

As observed with the rescue of Silicon Valley Bank (SVB) and Signature Bank, the systemic risk exception allows the Federal Deposit Insurance Corporation (FDIC) to intervene in situations where the stability of the financial system is at risk. Although it was deployed in the 2008 financial crisis and more recently in the latest banking turmoil, there is no guarantee it will be applied again, if another bank fails.

An understanding of the systemic risk exception can help depositors and bank counterparties set their expectations and prompt protective actions as vulnerability in the banking system persists.

The exception and its creation

Under the Federal Deposit Insurance Act (FDIA), the FDIC must act to protect insured depositors in the event of an insured institution's failure using a method of least cost to the federal government. The systemic risk exception, however, permits the FDIC to override the restrictions on cost under the FDIA, if the