Facing GOP critics, Yellen defends federal bank rescue move
Treasury Secretary Janet L. Yellen defended the federal government’s crisis response to the collapse of Silicon Valley Bank and Signature Bank amid fierce questioning from congressional Republicans during a committee hearing on Thursday.
Appearing in front of the Senate Finance Committee,
Yellen gave her most detailed explanation to date of why federal authorities moved to protect all uninsured deposits at SVB - while also seeking to assure lawmakers that the nation’s banking system is sound.
On Wall Street, regional bank stocks appeared mostly stable, and Swiss giant Credit Suisse recovered somewhat from its losses on Wednesday after tapping an emergency fund that the Swiss central bank set up. But shares in First Republic, another regional bank whose stock had come under pressure from investors last week, slid as traders watched to see if the bank would find new sources of capital.
Regional banks were on the mind of lawmakers in Washington. During one pointed exchange, Sen. James Lankford (R-Okla.) pressed Yellen on whether banks in his state would have to pay more to the Federal Deposit Insurance Corporation to protect the deposits at SVB now backstopped by the federal government.
On Sunday, Yellen and other federal regulators promised to make whole all uninsured deposits at SVB through a fund that raises money from fees assessed on banks. The Biden administration has maintained that taxpayers will bear no cost for backstopping the deposits, but critics have pointed out that these fees are raised from levies on banks, which could lead to higher fees for customers everywhere.
Lankford also charged that the interventions had effectively encouraged customers to pull their deposits from community banks and move them to larger financial institutions, where they were more likely to be protected by the kind of federal action authorized by the Biden administration.
“All banks make their revenue off rates and fees to account holders, which means every Oklahoman will pay higher fees on their bank,” Lankford said.
Yellen did not rebut Lankford’s charge but emphasized that authorities had to respond to avoid a worse panic.
“If we had a collapse of the banking system, that would have very severe effects on banks in Oklahoma that will also be threatened,” Yellen said.
Lankford also challenged Yellen to deny that SVB had a large number of Chinese companies that would see their money guaranteed by the insured deposit fund paid into by Oklahoma banks. Yellen responded: “Uninsured investors will be made whole in that bank, and I suppose that could include foreign depositors. But I don’t believe there’s any legal basis to discriminate against uninsured depositors.”
The exchange marked one of several between GOP senators and Yellen over the crisis at SVB and the federal government’s response to it.
Sen. Mike Crapo (RIdaho), the top Republican on the Finance Committee, argued that inflation exacerbated by government spending policies forced the Federal Reserve to raise interest rates quickly, which in turn threw the balance sheets of some banks out of whack. Crapo was also the lead author of a 2018 bank deregulation bill that repealed some rules on banks the size of SVB and Signature Bank, the two that regulators closed over the weekend, although experts disagree over whether it played a role in the current crisis.
“Inflation played a key role in the recent bank failures, as rising interest rates and mismanaged interest rate risk led to a liquidity crisis,” Crapo said.
Sen. Charles E. Grassley (R-Iowa) added: “Bank failures this past week highlighted how fragile our economy is given rising interest rates.”
Asked if inflation had a role in the SVB collapse, Yellen acknowledged that the interest rate hikes led to a decline in the value of some of the bank’s holdings. She declined to answer a question from Crapo over whether the FDIC “slowwalked” negotiations to find a buyer for SVB due to political reasons. Semafor reported earlier this week that the FDIC shut the largest banks out of the bidding process, citing the FDIC chair’s criticism of consolidation in the industry.
Sen. John Thune (R-S.D.) also asked whether federal banking regulators working from home, instead of in-person, could have contributed to officials missing the bank’s distress. “It seems to me from a supervisory standpoint, if your job is to examine banks it’s kind of something you have to be there to do,” Thune said.
Yellen also said much of the investigation into what happened at SVB would fall to the FDIC but that she would keep lawmakers updated.
The treasury secretary also faced pointed questions from Sen. Elizabeth Warren (D-Mass.), who argued that the Federal Reserve had made it harder for federal regulators to spot and remedy the kinds of problems that led to the crisis at SVB.
Warren slammed federal regulators and congressional Republicans for pushing looser rules in 2018 for the banking sector.
“This is part of the Fed’s action that led to weaker regulation,” Warren said. “Congress handed Chair Powell the flamethrower he aimed at the banking rules.”
Warren also said that “stress tests,” designed to measure the financial stability of a bank, had been weakened by that 2018 law. But Yellen pointed out that SVB encountered a “liquidity” crunch, meaning it did not have enough cash on hand to meet its obligations. Yellen said stress tests were more important for measuring bank capital - a separate measure of the amount of safe assets held.
The hearing came amid ongoing volatility in the banking sector.
Even as Yellen argued that the administration’s intervention to protect SVB depositors last weekend was necessary to shore up banks more broadly, the financial world awaited news on the fate of First Republic, which has come under renewed pressure from investors since SVB failed.
Its stock was down around 20 percent by mid Thursday amid speculation it might be sold, while PacWest fell by about 12 percent. Other regional bank stocks were mostly flat or slightly up.
Credit Suisse stock was up from Thursday’s lows, though, after the bank tapped an emergency fund promised by Swiss banking officials overnight, drawing up to $53.7 billion to ease liquidity concerns and buying back some of its own debt.