WASHINGTON —In the wake of the failure two banks, Treasury Secretary Janet L. Yellen came to the defense of the response by the Biden administration, the FDIC and other regulators and their plan for stabilizing the financial system. Yellen told the Senate the response had helped keep the problem from spreading among banks.
At the same time, a group of largest banks have combined to deposit $30 billion in another bank to keep it from becoming the latest to experience a run and potentially fail.
In remarks before the Senate Finance Committee, Yellen on several occasions offered reassurance that the country’s banks are safe and sound and that there is no threat to Americans deposits. Yellen had already been scheduled to appear before the committee before the failure of the $212-billion Silicon Valley Bank in California and the $110-billion Signature Bank in New York occurred.
Yellen’s comments came at the same time credit unions and their trade associations have been issuing statements offering similar assurances on the safety of deposits in CUs.
An Extraordinary Step
As CUToday.info has reported, the federal government has responded by taking the extraordinary step of saying all deposits will be covered, even though in the case of what’s now known to everyone as SVB, 90% of deposits exceeded the FDIC deposit insurance cap.
“We wanted to make sure that the problems at Silicon Valley Bank and Signature Bank didn't undermine confidence in the soundness of banks around the country,” Yellen told the Senate. “We wanted to make sure that there wasn’t contagion that could affect other banks and their depositors.”
In seeking to explain why the federal government had moved to guarantee the deposits, Yellen said that because of the nature of the run on Silicon Valley Bank, regulators feared the deposit run could spread and cause other banks to face similar outflows.
Despite the actions taken, Yellen said the federal government is not moving toward nationalizing the banking system.
GOP Members Point to Inflation Under Biden Administration
In their statements, GOP members of the committee suggested the banks’ failures were the result of spending policies by the Biden administration that had fueled inflation and driven the interest rate increases by the Fed that are among the contributors to the failure of Silicon Valley Bank (Signature Bank failed in part due to huge concentration risk from investments and holdings related to crypto.
Yellen told the Senate it’s time to re-examine the supervision of banks and the rules under which they are operating to “make sure they are appropriate to address the risks that banks face.”
A Risk for Any Institution
But she added in an observation made by others that no matter how robust the rules around capital and liquidity are, any institution can be put at risk of failing if there’s an “overwhelming run” spurred by social media. One congressman had referred to the failure of SVB as a “Twitter-fueled run.”
Big Banks Bail Out Another
Meanwhile, a number of big banks that include JPMorgan Chase, Citigroup, Bank of America and Wells Fargo are each making a $5 billion uninsured deposit into troubled First Republic, while Morgan Stanley and Goldman Sachs are each contributing $2.5 billion and five other banks are depositing $1 billion each.
The banks said in a statement they have been in discussions with Yellen and Treasury to create a plan to support the $212-billion First Republic.
“This show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system,” the Treasury Department, Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency said in a joint statement.
First Republic has been battling a falling stock price and customers pulling their deposits.