Janet Yellen, if necessary, will further signal the US government’s support for deposits in smaller US banks as it seeks to protect parts of the country’s banking system that have struggled in the recent financial turmoil.
Amid mounting evidence that panicked depositors are pulling savings out of regional banks, the U.S. Treasury secretary says guarantees offered to all depositors at a failed Silicon Valley bank will be replicated at other institutions if necessary.
“The actions we have taken are not focused on helping specific banks or classes of banks,” Yellen is expected to say in a speech to the American Bankers Association on Tuesday.
“Our intervention is necessary to protect the broader U.S. banking system. Similar measures may be warranted if smaller institutions experience deposit runs that pose contagion risk.
The U.S. Treasury, along with the Federal Reserve and the Federal Deposit Insurance Corporation, guaranteed all deposits at Silicon Valley Bank and Signature Bank, which failed this month. Additionally, the central bank announced a new facility to boost liquidity for struggling banks.
Yellen will also defend the “decisive” and “strong” steps taken by regulators to avoid a broader banking crisis in the U.S., even though the problems hitting smaller firms have yet to be resolved. A $30 billion lifeline thrown out by Wall Street bank chief executives — and cheered by the U.S. government — failed to stem a sharp selloff in First Republic Bank’s stock last week.
However, Yellen would suggest that the US is relatively comforted by market developments in recent days. “The situation is improving. And the American banking system is doing well,” he would say. “Deposit facility and discount window lending are working to provide liquidity to the banking system. Gross deposit outflow from regional banks has remained stable.
“We are fully focused on doing our job,” he adds. “You must be sure we will be vigilant.”
The Treasury Secretary will emphasize the importance of small and medium-sized banks to the U.S. economy. A major concern in recent days is that the current crisis will strengthen large financial institutions at the expense of smaller financial institutions.
“Big banks play an important role in our economy, but so do small and medium-sized banks,” Yellen said. “These banks are heavily involved in traditional banking services that provide vital credit and financial assistance to families and small businesses. They increase competition in the banking industry and have specialized knowledge and expertise in the communities in which they invest.
Yellen’s comments suggest the Biden administration expects more measures focused on propping up struggling private banks. However, U.S. officials are debating whether to take additional steps to restore confidence, including increasing or eliminating the $250,000 limit on deposits insured by the FDIC.
Unless Biden administration officials find a way to take action through executive action, such action would require congressional support.