How the FDIC Sourced Crisis-Time Fed Funding through the Failed Banks of 2023

During the Banking Crisis of 2023, the Federal Deposit Insurance Corporation (FDIC) had to contend with the liquidity demands of the second-, third-, and fourth-largest bank failures in US history, all in a compressed timeframe. Facing uncertainty over its liquidity needs, particularly if additional banks were to fail, and optics and political challenges over accessing its standing credit lines with the Treasury—which itself was brushing against the federal debt ceiling—the FDIC relied on two creative forms of financing itself. First, the agency kept open the Federal Reserve (Fed) loans taken on by the failed banks, eschewing its standard practice of immediately paying down the Fed loans of banks in receivership. The FDIC kept these loans despite selling the underlying collateral that the failed banks had posted to the Fed; it accomplished this by replacing the collateral at the Fed with FDIC corporate guarantees. Second, the FDIC used the failed banks’ FDIC-run bridge banks to obtain new and, in one case, uncollateralized loans from the Fed—again securing the Fed with an FDIC guarantee that the loans would be paid back. In taking these steps, the FDIC implemented a novel mechanism to supplement its liquidity in crises, notwithstanding the other potential motivations for making expansive use of this funding strategy and the legal uncertainties around it. However, the costs and risks of supplementing the FDIC’s crisis-time liquidity this way must also be considered.