Yellen calms talk of financial strife
The Treasury secretary was the first administration official to face lawmakers over the decision to protect uninsured money at the two failed regional banks, a move some have criticized as a bank “bailout.”
“The government took decisive and forceful actions to strengthen public confidence” in the U.S. banking system, Yellen testified. “I can reassure the members of the committee that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them.”
The week has been a whirlwind for markets globally on worries about banks that may be bending under the weight of the fastest hikes to interest rates in decades, increases intended to quell rising inflation on consumer goods.
In less than a week, Silicon Valley Bank, based in Santa Clara, Calif., failed after depositors rushed to withdraw money amid anxiety over the bank’s health. Then, regulators convened over the weekend and announced that New York-based Signature Bank also failed. They said that all depositors, including those holding uninsured funds exceeding $250,000, would be protected by federal deposit insurance.
The Justice Department and the Securities and Exchange Commission have since launched investigations into the Silicon Valley Bank collapse, and Biden has called on Congress to strengthen rules on regional banks.
White House press secretary Karine Jean-Pierre said Thursday, “There are things that we can do in the administration, but in order to really deal with this issue we have to act. Congress needs to act.”
Thursday’s hearing, originally scheduled to address Biden’s budget proposal for the fiscal year beginning next October, came after the sudden collapse of Silicon Valley, the nation’s 16th-biggest bank and a go-to financial institution for tech entrepreneurs. While lawmakers questioned Yellen on the federal deficit and upcoming debt ceiling negotiations, many focused instead on the bank failures and who was to blame.
The Biden administration’s “handling of the economy contributed to this,” insisted Sen. Tim Scott, R-S.C. “I plan to hold the regulators accountable.”
Sen. Mark Warner, D-Va., asked, “Where were the regulators in all of this?”
“Nerves are certainly frayed at this moment,” said Sen. Ron Wyden, D-Ore., who chairs the committee. “One of the most important steps the Congress can take now is make sure there are no questions about the full faith and credit of the United States,” he said, referring to raising the federal debt ceiling.
Crapo of Idaho, the committee’s top Republican, said, “I’m concerned about the precedent of guaranteeing all deposits,” calling the federal rescue action a “moral hazard.”
Yellen said on CBS’ “Face the Nation” last Sunday that a banks bailout was not on the table.
“We’re not going to do that again,” she said, referring to the government’s response to the 2008 financial crisis, which led to massive government rescues for large U.S. banks.
Yellen, a former Federal Reserve chairwoman and past president of the San Francisco Federal Reserve during the 2008 financial crisis, was a leading figure in the resolution this past weekend, which was engineered to prevent a wider systemic banking problem.
“This week’s actions demonstrate our resolute commitment to ensure that depositors’ savings remain safe,” she said.
Sen. Sherrod Brown, D-Ohio, compared the banks’ collapse to rail industry deregulation lobbying that Democrats say contributed to the East Palestine train derailment that rocked an Ohio community. “We see aggressive lobbying like this from banks as well,” he said.
In Europe, troubles at Credit Suisse deepened concerns about the global financial system.
The Swiss giant was having issues long before the U.S. banks collapsed, but the news Wednesday that the bank’s biggest shareholder would not inject more money led shares of European banks to plunge. On Thursday, they rose after the Swiss Central Bank’s action.
Regulators in the U.S. and abroad are trying to reassure depositors that their money is safe. They “don’t want anybody to be the person who sits in a darkened room or darkened cinema and shouts fire, because that’s what prompts a rush for the exits,” said Russ Mould, investment director at the online investment platform AJ Bell.