This is here only because it’s hard to look up, and so many people get it wrong. Here’s the law that enables the FDIC to pay off all deposits in the event of a bank failure. (Actually, it lets the FDIC do pretty much whatever seems to be required):
From the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA):
PUBLIC LAW 102-242—DEC. 19, 1991 105 STAT. 2275
"(G) SYSTEMIC RISK.—
"(i) EMERGENCY DETERMINATION BY SECRETARY OF THE
TREASURY.—Notwithstanding subparagraphs (A) and
(E), if, upon the written recommendation of the Board
of Directors (upon a vote of not less than two-thirds of
the members of the Board of Directors) and the Board
of Governors of the Federal Reserve System (upon a
vote of not less than two-thirds of the members of such
Board), the Secretary of the Treasury (in consultation
with the President) determines that—
"(I) the Corporation's compliance with subpara-
graphs (A) and (E) with respect to an insured
depository institution would have serious adverse
effects on economic conditions or financial stabil-
ity; and
"(II) any action or assistance under this subpara-
graph would avoid or mitigate such adverse effects,
« the Corporation may take other action or provide
assistance under this section as necessary to avoid or
mitigate such effects.
Source: Google link to Govinfo.
In short, it takes a two-thirds majority of both the FDIC governing board and the Federal Reserve Board in order to invoke the FDIC’s systemic risk clause. Also, agreement from the Secretary of the Treasury and the President of the U.S.
So, it’s kind of a big deal.
Based on what I’ve read, prior to this, it was common for the FDIC to make a case-by-case determination of whether or not to cover all deposits, regardless of the stated limits on coverage. The Congress got tired of that and decided to codify the regulatory procedures, in this 1991 legislation.
After that codification in 1991, the systemic risk clause has been invoked rarely over the following decades. Most notably, it was invoked for several large banks during the 2008 banking crisis.
So it’s notable in that it’s being used here. That should be, at most, a once-a-decade event.
You do have to wonder when or whether the other shoe is going to drop. Or whether we’ve had our once, for this decade.
