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

WASHINGTON, March 16 (Reuters) – The US banking system remains sound and Americans can be confident that their deposits will be there when they are needed, Treasury Secretary Janet Yellen said on Thursday, though she denied that recent bailouts following two major bank failures mean there is there was now a general government guarantee for all deposits.

In her first public remarks since the weekend’s emergency action with other regulators to ensure depositors at Silicon Valley Bank (SIVB.O) and Signature Bank (SBNY.O) do not suffer losses, Yellen pressed whether that meant all uninsured deposits were now guaranteed.

“A bank will only get that treatment,” she told Republican Senator James Lankford, if a vast majority of the boards of directors of the Federal Reserve, the Federal Deposit Insurance Corp and “I determine, in consultation with the president, that the failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences.”

Her comment was the first explicit indication of regulators’ views on the limits of the weekend’s extraordinary guarantee that kept tens of billions in uninsured deposits at Silicon Valley and Signature from being lost.

Ahead of that fair, Yellen had touted the “decisive and strong” emergency measures taken on Sunday, saying they had helped restore depositor confidence and prevent a wider run on banks.

“I can reassure the members of the committee that our banking system is sound 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 that depositors’ savings remain safe.”

But it was clear that the $250,000 per depositor limit on FDIC insurance remained in place and any future failure should carry risks similar to those in Silicon Valley and Signature.

In their case, she said, “the likelihood of contagion that other banks would be deemed 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 at the end of last year, accounting for more than 40% of all deposits, according to Federal Reserve data. Those uninsured deposits aren’t evenly distributed across the country, data from the FDIC shows.

‘DON’T LEAVE ON TOP’

The hearing, previously scheduled to discuss the Biden administration’s budget proposal, provided the first public accountability from a member of the group of bank overseers who organized the bailout following Silicon Valley’s bankruptcy last Friday. Signature was confiscated by regulators over the weekend.

The emergency measures extended beyond the depositor backstop, including improvements to banking sector liquidity anchored by the Fed. The actions have been met with both relief and surprise on Capitol Hill, where Democrats control the Senate and Republicans control the House of Representatives.

Several lawmakers lamented the failure of regulators to spot the vulnerabilities before the banks suddenly collapsed.

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

Yellen said Silicon Valley’s collapse was essentially an inability to meet depositors’ demands for their money after the Federal Reserve’s rate hikes over the past year undermined the value of bond investments relied on to make withdrawals. finance from customers. She also pointed to Silicon Valley’s high level of uninsured deposits as an aggravating factor.

“There was a liquidity risk in this situation,” Yellen told the committee. “It will be carefully looked at what happened in the bank and what caused this problem, but it is clear that the downfall of the bank, the reason the bank had to be closed, was that it could not meet the withdrawal requests of the depositors.”

She made no reference in the prepared remarks to the situation surrounding Credit Suisse, which saw its shares plummet on Wednesday before regulators promised a liquidity lifeline to the flagship Swiss lender.

“We are now very focused on stabilizing the banking system and strengthening confidence, and I think there will be plenty of time to look at what has happened and consider whether regulatory or supervisory changes are necessary.” she said.

“But for now, I would like to see confidence in the soundness of US banks restored.”

Reporting by Andrea Shalal; Edited by Kenneth Maxwell, Nick Zieminski and Marguerita Choy

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