YELLEN DEFENDS ACTION ON BANKING SYSTEM
Government intervention at two banks aimed to keep problems from spreading
Treasury Secretary Janet Yellen defended the federal government's actions to stabilize the U.S. financial system Thursday, saying recent moves to protect depositors at two banks were aimed at preventing problems from spreading through the banking system.
Yellen, appearing before the Senate Finance Committee, also sought to reassure the public that America's banks, whose stocks have been incredibly volatile in recent days, are “sound” and that their customer deposits are safe.
The comments were Yellen's first since the Treasury secretary and other federal regulators moved to contain fallout from the collapse of Silicon Valley Bank. On Sunday, the Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corp. announced that they would make sure that all depositors at Silicon Valley Bank and Signature Bank, which regulators also seized, were repaid in full.
“We wanted to make sure that the problems at Silicon Valley Bank and Signature Bank didn't undermine confidence in the soundness of banks around the country,” Yellen said. “We wanted to make sure that there wasn't contagion that could affect other banks and their depositors.”
Yellen played a central role in the rescue effort that was undertaken in the past week, ultimately declaring that Silicon Valley Bank posed a “systemic” threat to the economy. That determination opened the door to the Federal Reserve and the FDIC guaranteeing the uninsured deposits at the failing banks.
Her testimony came as she was working behind the scenes to broker a rescue of First Republic bank, which saw its shares plummet this week amid concerns that it could fail, by coordinating a $30 billion infusion from other financial institutions.
On Thursday, Yellen explained why the federal government intervened over the weekend, saying that
because of the nature of the run on Silicon Valley Bank, she and other regulators feared that the unease could spread and cause other banks to face similar outflows of cash.
Despite those actions, Yellen said that the United States was not taking a step in the direction of nationalizing the banking system. Although there have been suggestions that all of the nation’s deposits are effectively being insured — rather than just those up to $250,000 — the Treasury secretary made clear that any such guarantees would have to be approved by federal regulators and the Biden administration.
For now, it remains to be seen whether the response will calm the upheaval. Data released by the Fed on Thursday suggested that its new lending program is getting some use in its early days: Banks had borrowed $11.9 billion from it as of Wednesday. But banks borrowed far more heavily at the discount window — the Fed’s more traditional lending tool — amid last week’s tumult, tapping it for about $153 billion.
The banks’ collapse and the ensuing market turmoil have led to finger-pointing over whether a recent rollback of some of post-crisis financial regulations contributed to the failures. Yellen said that the nation’s regulatory framework should be reviewed to determine what happened, but her first priority is restoring confidence in the banking system.
Senate Republicans on Thursday largely shied away from criticizing the rescue and instead sought to blame the administration for the troubles that plagued the banks. They argued that President Joe Biden’s spending policies fueled inflation and created the need for the Fed to rapidly raise interest rates. That, they argued, destabilized Silicon Valley Bank by causing the value of its long-dated Treasury bonds and mortgage bonds to be eroded.
“The Biden administration’s handling of the economy contributed to these bank failures,” said Sen. Tim Scott, R-S.C. “The president’s budget is further evidence of reckless tax and spending that will only exacerbate
the highest inflation we’ve seen in 40 years.”
Other Republican senators pressed Yellen about the additional fees that small banks might face as a result of the FDIC using its funds to backstop Silicon Valley Bank. The Biden administration has insisted that its actions did not constitute
a bailout because the money was coming from bank fees rather than taxpayers.
In a pointed response to Sen. James Lankford, ROkla., Yellen said that the fallout for banks in his state would have been far worse if the federal government did not act.
“If we had a collapse of the banking system and its economic consequences, that will have very severe effects on banks in Oklahoma,” Yellen said.
The turmoil in the banking sector comes as Democrats and Republicans have been grappling with how to raise the nation’s statutory borrowing cap. The $31.4 debt limit was breached earlier this year, forcing the Treasury Department to use accounting maneuvers known as extraordinary measures to delay a default.
The Treasury secretary indicated that the current volatility in financial markets is a small taste of what would come if the United States fails to pay its bills on time. She described such a scenario as “beyond contemplation” and warned that it could lead to more runs on U.S. banks.
Yellen called for a reexamination of bank rules and supervision to “make sure they are appropriate to address the risks that banks face.” However, she suggested that regardless of current regulations, banks can be at risk.
“No matter how strong capital and liquidity supervision are, if a bank has an overwhelming run that’s spurred by social media so that it’s seeing deposits flee at that pace, a bank can be put in danger of failing,” Yellen said.