Treasury Secretary Janet L. Yellen said on Tuesday that the US government could repeat the drastic measures it recently took to protect bank deposits if smaller lenders are threatened.
“Our intervention was necessary to protect the broader U.S. banking system, and similar action may be warranted when smaller institutions face deposits that pose a risk of contagion,” Yellen said in a note to an American Bankers Assn. Conference in Washington.
The federal government is “committed” to mitigating risks to financial stability where appropriate, Yellen said in a question-and-answer session. “The public must have confidence in our banking system.”
Earlier this month, US authorities took extraordinary steps to bolster that confidence following the collapse of Silicon Valley Bank and Signature Bank. Regulators guaranteed insured and uninsured deposits at the two institutions. The Federal Reserve also introduced a new rebate for lenders and changed the rules for its emergency lending facility — called the rebate window — to help them take deposits.
Yellen said the current issues were strikingly different from the global financial crisis more than a decade ago, which was a solvency issue. Today’s challenge is “contagious bank runs” and it is important that borrowers have access to adequate liquidity, she said.
The Fed, of which Yellen previously chaired, is the most important institution, she said. The central bank’s discount window and its new Bank Term Financing Program are working “as intended,” she said.
“We see that the situation has improved,” while overall deposit outflows are stabilizing, Yellen said. Officials will continue to monitor the situation, she also said.
A coalition of medium-sized banks has been pushing for an expansion of federal deposit insurance to cover all deposits, but Yellen declined to comment on the issue on Tuesday. U.S. officials have begun evaluating whether to temporarily extend that coverage, Bloomberg reports.
Nor would Yellen “speculate” what sort of regulatory changes might be needed in the wake of this month’s bank collapses.
“We are currently focusing on the current situation,” she said in her prepared remarks. “But we need to reassess our current regulatory and supervisory regimes and see if they are appropriate for the risks banks face today.”
Yellen’s comments follow two weeks of turbulence in global markets and increased concerns about financial stability following the rapid collapse of US banks and a historic deal over the weekend in which UBS Group AG agreed to buy its ailing Swiss rival Credit. Suisse Group Ltd.
First Republic
In the US, First Republic Bank continues its fight to restore confidence after a slump. in its share price. JPMorgan Chase chief executive Jamie Dimon has spearheaded plans for a group of major banks to turn some or all of the $30 billion they poured into First Republic last week into a capital infusion, according to people familiar with the case.
On Tuesday, Yellen defended the government’s recent measures as a swift and necessary response.
“The federal government has delivered just that: decisive and decisive action to increase public confidence in the U.S. banking system and protect the U.S. economy,” she said.
The steps, she said, “reduce the risk of further bank failures, which would have caused losses to the Deposit Insurance Fund.”
She added that the US financial system is much stronger than it was in 2008, partly due to post-crisis reforms that imposed higher capital requirements on US borrowers.
Yellen also said the government hopes to preserve the role of small and medium-sized lenders within the larger financial system.
“Large banks play an important role in our economy, but so do small and medium-sized banks,” she said. “The Treasury Department is committed to ensuring the health and competitiveness of our vibrant community and regional banking institutions.”
Separately, Yellen reiterated her call for Congress to raise or suspend the federal debt limit, calling it “absolutely necessary”. While President Biden stands ready to work with lawmakers on the issue of fiscal sustainability, it should be done as part of the regular credit process, not under the threat of “catastrophic” bankruptcy, she said.
Source: LA Times