Janet Yellen points to more US support for deposits in smaller banks

Janet Yellen signaled more US government support for deposits in smaller US banks if needed, a shift that seeks to protect parts of the country’s banking system struggling in recent financial turmoil.

After signs that panicked depositors withdrew their savings from regional banks in recent days, the US Treasury secretary said the guarantees given to all depositors of the failed Silicon Valley bank could be replicated at other institutions if needed.

“The steps we have taken are not focused on helping specific banks or classes of banks,” Yellen said in a speech to the American Bankers Association on Tuesday.

Our intervention was necessary to protect the broader US banking system. Similar measures may be warranted if small institutions have experienced deposit inflows that pose a risk of contagion.”

The US Treasury worked with the Federal Reserve and the Federal Deposit Insurance Corporation to provide guarantees for all deposits, including uninsured deposits, at Silicon Valley Bank and Signature Bank, both of which failed this month. In addition, the Fed announced new facilities to boost liquidity for troubled banks.

Yellen also defended the “decisive” and “robust” steps taken by regulators to avert a broader banking crisis in the United States, even though the problems plaguing smaller institutions are still far from resolved. The $30 billion lifeline put in place by the CEOs of Wall Street banks — and the US government — initially failed to stem a sharp sell-off in First Republic shares.

Nevertheless, Yellen noted that the US is relatively comfortable with market developments in recent days. The situation is settling down. She said the US banking system remains healthy. The Fed and discount window lending facilities are working as intended to provide liquidity to the banking system. The overall deposit outflows from regional banks have stabilized.”

“We are focused squarely on doing our job,” she added. “And you should rest assured that we will remain vigilant.”

The Treasury Secretary also stressed the importance of small and medium-sized banks to the US economy. The big concern in recent days has been that the current crisis will strengthen larger financial institutions at the expense of smaller ones.

“Large banks play an important role in our economy, as do small and medium-sized banks,” Yellen said. These banks are heavily involved in traditional banking providing vital credit and financial support to families and small businesses. They also increase competition in the banking sector, and often have specialized knowledge and expertise in the communities in which they invest.”

Yellen’s comments indicate that the Biden administration expects any additional measures to focus on supporting individual banks that may be struggling. However, US officials are also debating whether they need to take additional steps to restore confidence, including increasing or removing the $250,000 cap on deposits insured by the FDIC.

Congressional support would be required for such a move unless Biden administration officials find a way to certify the measure through executive action.