What Is A Bank Bailout? (2024)

Bank bailouts can be traced back decades. From the savings and loan crisis of the 1980s to the Great Recession of 2008, banks have been bailed out by the government many times over.

Below, we’ll take a closer look at some of the most significant bank bailouts in history and how they impacted the economy.

What Is a Bank Bailout?

A bank bailout is when a government steps in to rescue a struggling bank by providing it with financial support. The goal is to prevent the bank from collapsing, which can have negative consequences for consumers such as unemployment spikes and reduced access to credit. These events can have a ripple effect on other banks and even the economy.

Bank bailouts can be a controversial topic because taxpayer dollars are often used to assist banks in trouble.

Bank Failures vs. Bank Bailouts

When a troubled bank is not bailed out, it may become insolvent, meaning it is in debt to its depositors. This leads to bank failure. Banks that fail are generally forced to close down, and the FDIC steps in to ensure that depositors do not lose insured funds in these situations.

However, sometimes financially stable banks decide to take on a failing bank’s assets and liabilities. When this happens, the failure can have less of an economic impact because existing bank accounts, and sometimes employees, are assumed by the new bank.

A bank bailout, by contrast, occurs before a bank failure. Bailouts are intended to prevent banks from failing.

Examples of Bank Bailouts

There are many examples of bank bailouts throughout history. Here are several noteworthy instances of banks being rescued, why the banks needed help and how they were bailed out.

1974: Franklin National Bank

In 1974, Franklin National Bank faced a severe crisis due to massive losses—roughly $64 million in just five months. The U.S. government intervened by providing $1.75 billion in financial assistance in an attempt to prevent Franklin National Bank from collapsing. This bailout marked one of the early instances of government intervention to stabilize a financial institution.

Unfortunately, the efforts were in vain as the bank collapsed a few months later and was taken over by the European-American Bank and Trust Company.

1984: Continental Illinois National Bank and Trust Company

The Continental Illinois National Bank and Trust Company was a major bank in the United States that failed in 1984 due to risky lending practices. Rumors of bank failure started circulating in May, leading to a bank run. A significant portion of depositors and lenders started to withdraw funds and cut ties with the bank at once, putting Continental even further in debt.

The bank was bailed out by the Federal Deposit Insurance Corporation (FDIC), Federal Reserve and Office of the Comptroller of the Currency. Together these regulatory agencies provided $2 billion. The FDIC guaranteed depositor funds and purchased $4.5 billion worth of bad loans from the bank when no solvent institution could be found to merge with Continental.

The Continental Illinois bailout was controversial for many reasons, but perhaps most significantly because it was seen as evidence that some banks were “too big to fail.” People were concerned that the government would be forced to bail out other big banks in the future.

2008: Citigroup

During the 2008 financial crisis, Citigroup faced imminent collapse due to heavy losses from toxic assets. The Troubled Assets Relief Program (TARP), established under the Emergency Economic Stabilization Act of 2008, authorized the U.S. government to send $45 billion to Citigroup. TARP bailouts aimed to stabilize the banking sector as a whole and prevent a broader economic meltdown.

2009: Bank of America

In 2009, Bank of America faced severe financial difficulties due to its acquisition of troubled lender Countrywide Financial and exposure to risky mortgage-backed securities. The government intervened by providing financial assistance through TARP, which included a $45 billion capital injection.

Later, Bank of America was ordered to pay $16.65 billion in a historic settlement with the U.S. Justice Department over allegations of financial fraud leading up to the 2008 financial crisis. The $16.65 billion settlement included nearly $10 billion to resolve civil claims and $7 billion in relief to help consumers affected by the unlawful lending practices of Bank of America, Merrill Lynch and Countrywide Financial Corporation.

Have There Been Any Bank Bailouts in 2023?

There have not been any bank bailouts in 2023 as of the time of this writing. However, the banking industry has experienced significant bank failures, including the collapse of Silicon Valley Bank (SVB), Signature Bank and First Republic Bank.

These regional banks failed due to a combination of factors, including federal interest rate hikes, risky management practices and bank runs resulting from consumers’ concerns about bank safety. The collapse of SVB, in particular, was notable because it was one of the largest bank failures in U.S. history.

The SVB debacle was so big, in fact, that it required the FDIC to step in to protect customer deposits. But technically, this wasn’t a bank bailout. Rather, the government stepped in to ensure customers didn’t lose deposits. Then, the bank was absorbed by First Citizens Bank.

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