by WASHINGTON, March 16 (Reuters) – The US banking system remains sound and Americans can be confident that their deposits are safe, Treasury Secretary Janet Yellen said on Thursday, but denied that emergency measures following two major bank failures mean that a blanket government guarantee now existed for all deposits.
In her first public remarks since the weekend’s emergency action with other regulators to ensure depositors at Silicon Valley Bank (SIVB.O) and Signature Bank (SBNY.O) do not suffer losses from those lenders’ failures, Yellen was pressed at a hearing before the US Senate Finance Committee if it meant all uninsured deposits were now guaranteed.
“A bank only gets that treatment,” she told U.S. Republican Senator James Lankford, if a vast majority of the boards of directors of the Federal Reserve, the Federal Deposit Insurance Corp and “I determine, in consultation with the President, that failure to protect uninsured savers would create systemic risks and significant economic and financial consequences.”
Her comment was the first explicit indication of regulators’ views on the limits of the weekend’s extraordinary guarantee that kept tens of billions in uninsured deposits at Silicon Valley and Signature from being lost.
Ahead of that fair, Yellen had touted the “decisive and strong” emergency measures taken on Sunday, saying they had helped restore depositor confidence and prevent a wider run on banks.
“I can reassure the members of the committee that our banking system is sound and that Americans can be confident that their deposits will be there when they need them,” Yellen said.
“This week’s actions demonstrate our determination to ensure that depositors’ savings remain safe.”
But it was clear that the FDIC insurance limit of $250,000 per depositor remained in place and any future failure should carry risks similar to those in Silicon Valley and Signature.
In their cases, Yellen said, “the likelihood of contagion that other banks would be deemed unsound and face a run seemed extremely high, and the consequences would be very serious.”
More than $9.2 trillion in US bank deposits were uninsured at the end of last year, accounting for more than 40% of all deposits, according to US Federal Reserve data. Those uninsured deposits aren’t evenly distributed across the country, data from the FDIC shows.
‘DON’T LEAVE ON TOP’
The hearing, previously scheduled to discuss the Biden administration’s budget proposal, provided the first public accountability from a member of the group of bank overseers who organized the bailout following Silicon Valley’s bankruptcy last Friday. Signature was confiscated by regulators over the weekend.
[1/2] U.S. Treasury Secretary Janet Yellen attends a U.S. House Ways and Means Committee hearing on President Joe Biden’s fiscal year 2024 budget request on Capitol Hill in Washington, U.S., March 10, 2023. REUTERS/Evelyn Hockstein/File Photo
Yellen said she was first made aware of the SVB’s difficulties last Thursday, a day before regulators closed the bank.
The emergency measures extended beyond the depositor backstop, including improvements to banking sector liquidity anchored by the Fed. The moves have been met with both relief and surprise in Congress, where Democrats control the Senate and Republicans control the House of Representatives.
Several senators complained that regulators failed to recognize the vulnerabilities and demand changes before the banks suddenly collapsed.
“This administration has a big responsibility for the bank failures we’ve had,” Republican Senator Charles Grassley told reporters outside the hearing, adding that California regulators were “not on top of things.”
Republican Senator Tim Scott tried to blame the Biden administration’s spending policies for fueling inflation that led to SVB’s troubles, as rapid rate hikes by the Fed eroded the value of its bond holdings – a claim that Yellen backed. turned down.
But the Treasury chief said inflation is still the “number one economic problem” for the United States, and that reducing it is President Joe Biden’s top priority, adding that the Fed should “do its part” to that effort.
Some Democrats blamed a 2018 law drafted by Republicans that lowered the threshold for “systemically important” banks that needed more oversight — a club SVB would have been in under previous rules.
FOCUS ON STABILITY
Yellen said Silicon Valley’s collapse was essentially an inability to meet depositors’ demands for their money after the Fed’s interest rate hikes over the past year undermined the value of bond investments relied on to boost withdrawals. finance customers. She also pointed to Silicon Valley’s high level of uninsured deposits as an aggravating factor.
“There was a liquidity risk in this situation,” Yellen told the committee. “It will be carefully looked at what happened in the bank and what caused this problem, but it is clear that the downfall of the bank, the reason the bank had to be closed, was that it could not meet the withdrawal requests of the depositors.”
Her testimony focused on the safety of the US banking system and made no references to the troubles surrounding Credit Suisse, which saw its shares plummet on Wednesday before regulators pledged a $54 billion liquidity lifeline to the flagship Swiss lender.
Yellen said regular stress tests for US banks can help identify potential problems, but noted that stress tests for regulators now look for capital shortfalls, not liquidity problems.
“We are currently very focused on stabilizing the banking system and strengthening confidence, and I think there will be plenty of time to look at what has happened and consider whether regulatory or supervisory changes are necessary.” she said.
“But for now, I would like to see confidence in the soundness of US banks restored.”
Additional reporting by Daniel Burns, Andrea Shalal and Richard Cowan; Edited by Kenneth Maxwell, Nick Zieminski, Marguerita Choy and Paul Simao
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