U.S. Banking Sector Developments and the Debt Limit

Recent events in the banking sector have sparked queries over potential impacts to the ongoing debt limit debate. Specifically, will the federal government’s response to these bank failures consume resources that are being used to forestall the X Date, the day when the Treasury Department would no longer be able to meet all its obligations in full and on time? (Check out BPC’s latest analysis.)

The short answer—at least for now—is “no.” The two main policy responses thus far have been insuring all deposits at Silicon Valley Bank and Signature Bank and standing up a facility at the Federal Reserve to help other banks solve similar liquidity challenges. Let’s take them one at a time.

• Funds for deposit insurance are obtained from the Federal Deposit Insurance Corporation’s trust fund that has accumulated assets—in the form of non-marketable U.S. Treasury securities—from its collections of deposit insurance. When making payouts to depositors, those securities are redeemed, creating room under the debt limit (since government trust funds also count towards total debt). Then, an equivalent amount of debt is issued to the public, raising the cash to pay out depositors. The entire transaction is a wash as far as the debt limit is concerned.
• The Federal Reserve’s Bank Term Funding Program will provide liquidity to qualifying institutions by offering loans in exchange for various forms of collateral. These will be market-based transactions with no expectation of realized losses, but as a backstop, the Treasury Department has pledged up to $25 billion from the Exchange Stabilization Fund (ESF), which happens to be one of the trust funds that the Treasury Department can utilize for debt limit extraordinary measures. The Treasury Department and Federal Reserve do not expect ESF funds to be needed as a backstop for the new program. Nonetheless, in the unlikely event they are tapped over the next few months, the resources would probably come from a portion of the ESF separate from its non-marketable U.S. Treasury securities (which would be insufficient to cover the total amount). Thus, although there’s a possibility of modestly accelerating the X Date time frame, that scenario seems remote.

Of course, it’s possible that policymakers will need to take further action to stabilize the banking sector in the coming weeks and months. BPC will monitor evolving policy responses and their potential impact on the debt limit. Meanwhile, we continue to track daily cash flows and will update our X Date analysis after the conclusion of tax season.