WASHINGTON — Treasury Secretary Janet Yellen sought to reassure markets and lawmakers on Thursday that the federal government is committed to protecting U.S. bank deposits following the failure of Silicon Valley Bank and Signature Bank over the weekend.
“Our banking system remains sound and Americans can feel confident that their deposits will be there when they need them,” Yellen said.
Yellen has been at the center of emergency federal efforts this past week to return deposits to account holders at two failed banks, the California-based Silicon Valley Bank and the crypto-heavy Signature Bank, based in New York.
To shore up troubled banks facing a surge in cash withdrawals, the Federal Reserve also created a new lending program that Yellen said would “provide additional support” to the banking system. “This will help financial institutions meet the needs of all of their depositors.”
“This week’s actions demonstrate our resolute commitment to ensure that depositors’ savings remain safe,” Yellen told the senators.
U.S. bank regulators announced a plan Sunday to fully insure all deposits at the two banks, above the $250,000 limit provided by traditional FDIC insurance. The additional protection will be paid for by a special fee levied on all FDIC insured institutions, they said.
In addition, the Federal Reserve loosened its borrowing guidelines for banks seeking short-term funding through its so-called discount window and set up a separate unlimited facility to offer one-year loans to back up banks under looser terms than usual to U.S. deposit institutions and prevent future bank runs. Both programs are being paid for through industry fees, not by taxpayers, the Biden administration has emphasized.
Democrats and Republicans in Congress have largely supported the emergency actions taken in the past week. But with markets recovering somewhat, lawmakers questioned whether backstops for big banks will become a new norm, and what that could mean for community lenders.
“I’m concerned about the precedent of guaranteeing all deposits and the market expectation moving forward,” Sen. Mike Crapo, R-Idaho, the committee’s ranking member, said in his opening remarks.
Republican Sen. James Lankford of Oklahoma pressed Yellen about how widely the uninsured deposit backstops will apply across the banking industry.
“Will the deposits in every community bank in Oklahoma, regardless of their size, be fully insured now?” asked Lankford. “Will they get the same treatment that SVB just got, or Signature Bank just got?”
Yellen acknowledged they would not. Uninsured deposits, she said, would only be covered in the event that a “failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences.”
Lankford said the impact of this standard would be that small banks would be less appealing to depositors with more than $250,000, the current FDIC insurance threshold.
“I’m concerned you’re … encouraging anyone who has a large deposit at a community bank to say, ‘we’re not going to make you whole, but if you go to one of our preferred banks, we will make you whole.'”
“That’s certainty not something that we’re encouraging,” Yellen replied.
This is a developing story, please check back for updates.
