Finance - March 16, 2023

Yellen says US banking system sound despite turmoil

US Treasury Secretary Janet Yellen

The US banking system remains sound despite market anxiety over the recent collapse of Silicon Valley Bank (SVB) and Signature Bank, Treasury Secretary Janet Yellen told members of Congress on Thursday.

The consecutive bank failures are the sector’s biggest casualties since the 2008 financial crisis, prompting US authorities to quickly step in to protect depositors.

Amid contagion fears, the US Federal Reserve also announced it would make extra funding available to banks to help them meet depositors’ needs, which would include withdrawals.

“This week’s actions demonstrate our resolute commitment to ensure that our financial system remains strong, and that depositors’ savings remain safe,” Yellen told the Senate Finance Committee.

“I can reassure the members of the committee that our banking system is sound,” she added at the hearing, which also addressed President Joe Biden’s latest budget proposals.

Fears of contagion have spread to Europe, with a market rout forcing Credit Suisse, Switzerland’s second-biggest bank, to tap a financial lifeline from that nation’s central bank.

SVB — the United States’ 16th biggest bank by assets and a key lender to startups in the country since the 1980s — collapsed after a sudden run on deposits, prompting regulators to seize control on Friday.

On Sunday, the Treasury, Fed, and Federal Deposit Insurance Corporation (FDIC) set out plans to ensure SVB customers would be able to access their deposits, while the Fed introduced a new lending tool for banks in an effort to prevent a repeat of SVB’s quick demise.

A similar exception was announced for Signature Bank, which collapsed at the weekend.

“We felt that there was a serious risk of contagion that could have brought down and triggered runs on many banks,” said Yellen of the situation.

But such intervention required a decision involving top officials, who had to “determine that the failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences,” she said.

SVB had a high reliance on uninsured deposits, and there was a massive withdrawal of deposits that led to liquidity problems.

‘Careful look’

Asked Thursday about the issues behind SVB’s collapse, Yellen noted that the bank, to meet liquidity needs, had to sell assets it expected to hold to maturity.

Given the interest rate increases that have occurred, assets including US Treasury securities had lost market value, she said.

“There will be a careful look at what happened in the bank, and what initiated this problem,” Yellen added.

A more general problem is the possibility that if banks are under stress, they might be “reluctant to lend where they’re worried about shoring up liquidity and capital,” she said.

“We could see credit become more expensive and less available.”

On the debt ceiling and whether the Biden administration would commit to negotiating with Republicans amid efforts to introduce aspects of “fiscal restraint” into the discussion, Yellen said Biden, a Democrat, is prepared for talks but this “can’t be a condition for raising the debt ceiling.”

The United States risks defaulting on payment obligations as soon as July if lawmakers fail to resolve a gridlock and raise the federal borrowing limit, according to Congressional Budget Office estimates.

Republicans are threatening to block the usually rubber-stamp approval for raising the nation’s credit limit, if Democrats do not first agree to steep future budget cuts.

“The debt ceiling simply must be raised, and to put at risk the full faith and credit of the United States and to threaten to cause an economic and financial catastrophe isn’t an acceptable requirement,” Yellen said.

“Our systems are built to pay all of our bills on time and not to pick and choose which bills to pay,” she added.

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