The US banking system is sound, but not all deposits are guaranteed, Yellen tells senators

WASHINGTON (Reuters) – The U.S. banking system remains solid and Americans can be confident their deposits will be there when they’re needed, Treasury Secretary Janet Yellen said Thursday, though she denied the latest emergency measures after two big bank failures This means that there was now a blanket state guarantee for all deposits.

In her first public statements since the weekend’s emergency action with other regulators to ensure no depositors at Silicon Valley Bank (SIVB.O) and Signature Bank (SBNY.O) suffer losses, Yellen was pressured into whether to do so means that all uninsured deposits are now guaranteed.

“A bank only gets this treatment,” she told Republican Senator James Lankford, if supermajorities of the boards of directors of the Federal Reserve, the Federal Deposit Insurance Corp and “I, in consultation with the President, determined that the failure to allow uninsured depositors.” would create systemic risk and significant economic and financial consequences.”

Her comment was the first explicit reference to regulators’ views on the limits of the weekend’s extraordinary guarantee, which ensured tens of billions of dollars in uninsured deposits in Silicon Valley and Signature were not lost.

Ahead of that exchange, Yellen had touted the “firm and forceful” emergency measures taken on Sunday, saying they had helped restore depositor confidence and prevented a broader run on banks.

“I can assure the members of the committee that our banking system is healthy and that Americans can be confident that their deposits will be there when they need them,” Yellen said in the remarks.

“This week’s actions demonstrate our determination to ensure depositors’ savings remain safe.”

However, it was clear that the $250,000 per depositor limit for FDIC insurance remained in place and that any future default would have to carry risks similar to those in Silicon Valley and Signature.

In her cases, she said, “the chances of contagion that other banks could be seen as unsound and suffer runs seemed extremely high and the consequences would be very serious.”

More than $9.2 trillion in U.S. bank deposits were uninsured late last year, accounting for more than 40% of all deposits, according to Federal Reserve data. These uninsured deposits are not evenly distributed across the country, FDIC data shows.

[1/2] US Treasury Secretary Janet Yellen attends a House Ways and Means Committee hearing on President Joe Biden’s fiscal year 2024 budget proposal on March 10, 2023 on Capitol Hill in Washington, United States. REUTERS/Evelyn Hockstein/File Photo

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The hearing, previously scheduled to discuss the Biden administration’s budget proposal, offered the first public account by a member of the group of bank supervisors who orchestrated the bailout after Silicon Valley’s failure last Friday. The signature was confiscated by regulators over the weekend.

The emergency measures extended beyond the depositor backstop, including improvements to banking sector liquidity enshrined by the Fed. On Capitol Hill, where Democrats control the Senate and Republicans control the House of Representatives, the action was greeted with both relief and amazement.

Several lawmakers bemoaned the failure of regulators to patch the vulnerabilities before the banks suddenly collapsed.

“This administration bears a great deal of responsibility for the bank failures that we’ve had,” Republican Senator Charles Grassley told reporters outside of the hearing, adding that regulators in California “were not on top of it.”

Yellen said Silicon Valley’s collapse was largely due to an inability to meet depositors’ demands for their money after last year’s Federal Reserve rate hikes eroded the value of the bond investments it relies on to fund withdrawals the customer supported. She also cited the high number of uninsured deposits in Silicon Valley as an aggravating factor.

“There was a liquidity risk in that situation,” Yellen told the committee. “There is a close investigation into what happened at the bank and what triggered this issue, but the demise of the bank, the reason it closed, was clearly that it was unable to meet depositors’ withdrawal requests.”

She did not mention in the prepared remarks the situation surrounding Credit Suisse, whose shares plummeted on Wednesday before regulators promised a liquidity lifeline to Switzerland’s main lender.

“We are currently very focused on stabilizing the banking system and increasing confidence and I think there will be plenty of time to see what has happened and consider whether or not regulatory or supervisory changes are needed. ” She said.

“But now I want confidence restored in the health of American banks.”

Reporting by Andrea Shaal; Editing by Kenneth Maxwell, Nick Zieminski and Marguerita Choy

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