Janet Yellen: US banking system is ‘sound’ despite two collapses in a week
The treasury secretary, Janet Yellen, told Congress on Thursday that despite two US bank failures over the past week the US banking system “remains sound”.
The government’s response to the collapse of Silicon Valley Bank and Signature Bank last weekend were “decisive and forceful actions to strengthen public confidence in our banking system”, Yellen told the Senate finance committee.
Yellen’s remarks were designed to reassure nervous depositors and investors that despite the spread of financial system eruptions to Credit Suisse and beyond, the emergency measures taken on Sunday had succeeded.
“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”, Yellen said.
But she also underscored the message that political, finance and regulatory officials have been making since the two banks collapsed that the government’s intervention was not the same as the unpopular bailout of banks in the 2008 financial crisis.
“Shareholders and debtholders are not being protected by the government. Importantly, no taxpayer money is being used or put at risk with this action. Deposit protection is provided by the Deposit Insurance Fund, which is funded by fees on banks,” Yellen said.
Republicans on the committee questioned whether the backstops will become a new normal and the implications that could have on moral hazard.
“I’m concerned about the precedent of guaranteeing all deposits and the market expectation moving forward,” said Mike Crapo, a Republican senator.
Yellen later responded that the Fed, the Treasury and government insurers had stepped in because they “recognized a serious risk of contagion that could have brought down and triggered runs on many banks”.
The US treasury secretary also addressed high inflation, the issue that underscores a sharp, year-long rise in Federal Reserve interest rates that triggered the bank collapses.
Yellen said while there had been some improvement in headline inflation “more work needs to be done”.
In response to senators’ questions, Yellen said: “I consider inflation the number one economic problem that all of us need to face and and address.” She said high inflation was “the president’s top priority” and “many factors” had contributed to it, and it was “critical” for the Fed to address it.
That may be taken as a signal to the markets that the growing pressure to stall interest rate rises to stave off further banking sector turmoil may not convince the US treasury or counterparts at the Federal Reserve to immediately change course.
On Thursday, the European Central
Bank (ECB) stuck with its plan to hike interest rates by half a percentage point.
“The euro area banking sector is resilient, with strong capital and liquidity positions,” the ECB said in a statement. “The ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy.”
Yellen’s remarks came hours after Goldman Sachs analysts said the probability that the US economy will enter a recession in the next 12 months had increased by 10% to 35%. The report cited stress on smaller banks as a contributing factor.