A Full Bank Deposit Backstop Is Impossible

A Full Bank Deposit Backstop Is Impossible

The Fed, Treasury and the FDIC are writing a check they can’t cash. Based on their rhetoric, the three Government organizations have implied that they will backstop all bank deposits. It would be impossible for this unholy triumvirate to do so given the tab could be north of $15 Trillion at the extreme.


There were 563 U.S. bank failures from 2001 through 2023 (chart below). 465 of those banks failed between 2008-2012. Those 465 banks had combined assets of $689 Billion.

2 U.S. banks have failed with combined assets of $319 Billion year-to-date (through March 14th). The asset destruction this time around will be far worse than the Great Financial Crisis of 2008, even if the Fed was to take rates to zero percent tomorrow.

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All FDIC banks had $19.2 Trillion of deposits (table below) with $12.0 Trillion of loans outstanding. This represents a loan-to-deposit ratio of 63% (as of 12/31/22). That is to say that at a minimum, 63% of deposits are not on hand. This obviously presents a problem should a majority of depositors wish to withdraw their money at the same time.

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However, the problem is even more serious. While 63% of all deposits were loaned out as of 12/31/22, that is not to say that the remaining 37% of deposits were on hand. No, that’s hardly the case. You can be certain that a significant portion of those deposits were deployed across various financial instruments, some of them long-term in nature.

  • For example, Silicon Valley Bank (SVB), had a loan-to-deposit ratio of 43% at the time of its collapse as deposits not deployed as loans were deployed across other financial instruments (many of long duration). This duration mismatch created a liquidity crunch.
  • If there was a full run on all FDIC banks, some number between $12.0 Trillion and $19.2 Trillion is deployed in the economy which would force the banks to generate liquidity by selling other assets. These actions would not cover the tab. Thus, the Fed, Treasury and the FDIC would be on the hook for more than half of U.S. GDP were it to provide a full deposit backstop. That’s not going to happen.

Which banks are safe? The triumvirate could backstop J.P. Morgan, Bank of America, Wells Fargo and Citi, but not a full backstop if a bank run were to occur at all four banks simultaneously. To backstop 100% of deposits at all four banks simultaneously would be impossible as we are talking about $7.0 Trillion in deposits across the four banks (as of 12/31/2022), of which $3.8 Trillion have been extended as loans to say nothing of how the remaining $3.2 Trillion in deposits may be deployed.

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