Who’s Paying for All These Bank Failures?

Despite a buyout by JPMorgan (JPM), the collapse of First Republic Bank (FRC) will cost the Federal Deposit Insurance Corporation (FDIC) approximately $13 billion, though neither taxpayers nor the government is footing that bill.

First Republic is the third high-profile bank that has failed in the U.S. this year and the second-largest in the nation’s history. The FDIC put the bank under a receivership early Monday morning, sold all its assets to JPMorgan, and took the liability hit.

The FDIC had already covered about $23 billion when Silicon Valley Bank and Signature Bank collapsed in March. The federal agency gets this money from a fund known as the Deposit Insurance Fund (DIF) meant to resolve bank failures in an orderly manner.

The FDIC protects bank customers by insuring deposits of up to $250,000 by placing failed banks under receivership and divesting their assets. Deposits in excess of $250,000 are called uninsured deposits and aren’t usually covered by the FDIC’s insurance fund. The ultimate cost of bank takeovers and bailouts is covered by the DIF, which is depleted each time a bank is placed under receivership.

The FDIC’s Deposit Insurance Fund raises money in two ways. The first is through assessments, or insurance premiums on FDIC-insured banks and financial institutions, which pay to register and hold an account with the FDIC. As of December 31, there were 4,706 banks registered with the FDIC.

The second source of revenue is interest earned on U.S. government bonds. Revenues from these two sources add to the balance of the fund, while deposit payouts in the event of bank failures, along with operating expenses, subtract from it. The value of the DIF hit a record $128.2 billion on December 31, prior to this year’s bank failures.

While taxpayers may not directly foot the bill, some losses may ultimately trickle down. For example, if your bank has to pay more for deposit insurance, it might charge you a higher interest rate on a loan or offer you a lower interest rate on your savings account.

In March, after local regulators in California and New York closed down Silicon Valley Bank and Signature Bank, respectively, the FDIC placed these institutions under receivership, assuming control of their assets, liabilities, and deposits. The FDIC made an exception for the two banks that allowed all depositors, even those with deposits greater than $250,000, to be made whole.

The cost to the FDIC would be roughly $20 billion for Silicon Valley and $2.5 billion for Signature Bank. The lion’s share of the two failed banks’ assets were eventually acquired by First Citizens Bank (FCNCA) and Flagstar Bank, respectively.

The failure of the two big banks within a few days set off deep turmoil within the regional banking sector, which dragged down First Republic and led to declines in the share price of regional banks including Western Alliance (WAL), Zions Bancorp (ZION), PacWest Bancorp (PACW), and Charles Schwab (SCHW), as investors grew vary of how much of their deposits were uninsured.