US banking system strong, but not all deposits guaranteed, Yellen tells senators

WASHINGTON, March 16 (Reuters) – The U.S. banking system remains strong and Americans can be confident their deposits will be there when needed, Treasury Secretary Janet Yellen said on Thursday, although she denied that recent moves emergency following two major bank failures meant that a general government guarantee now existed for all deposits.

In his first public remarks since the weekend emergency measures with other regulators to ensure that no depositor at Silicon Valley Bank (SIVB.O) and Signature Bank (SBNY.O) suffers of losses, Yellen was pressed if that meant all uninsured deposits were now guaranteed.

“A bank only gets this treatment,” she told Republican Senator James Lankford, if supermajorities on the boards of the Federal Reserve, Federal Deposit Insurance Corp and “I, in consultation with the President, determine that failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences.”

His comment was the first explicit indication of regulators’ views on the limits of the extraordinary weekend guarantee that ensured that tens of billions of uninsured deposits in Silicon Valley and Signature were not lost.

Ahead of that exchange, Yellen had touted the “decisive and forceful” emergency measures taken on Sunday, saying they had helped restore depositor confidence and prevented a broader run on banks.

“I can reassure committee members that our banking system is strong and that Americans can be sure their deposits will be there when they need them,” Yellen said in his remarks.

“This week’s actions demonstrate our strong commitment to ensuring the safety of depositors’ savings.”

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

In their case, she said, “the risks of contagion for other banks to be seen as unhealthy and suffer crises seem extremely high and the consequences would be very serious.”

More than $9.2 trillion in US bank deposits were uninsured at the end of last year, representing more than 40% of all deposits, according to Federal Reserve data. These uninsured deposits are not evenly distributed across the country, according to FDIC data.

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The hearing, originally scheduled to discuss the Biden administration’s budget proposal, offered the first public account from a member of the banking watchdog group that staged the bailout after Silicon Valley failed last Friday. . The signature was seized by regulators over the weekend.

The emergency measures went beyond the safety net for depositors, including improvements in banking sector liquidity anchored by the Fed. The actions were met with relief and astonishment on Capitol Hill, where Democrats control the Senate and Republicans the House of Representatives.

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

“This administration has a lot of responsibility for the bank failures that we’ve had,” Republican Senator Charles Grassley told reporters outside the hearing, adding that regulators “didn’t know” in California.

Yellen said Silicon Valley’s collapse was essentially an inability to meet depositors’ demands for their money after interest rate hikes by the Federal Reserve over the past year reduced the value of investments. bonds on which client withdrawals are based. She also noted the high level of uninsured deposits in Silicon Valley as an aggravating factor.

“There was liquidity risk in this situation,” Yellen told the committee. “There will be careful consideration of what happened in the bank and what triggered this problem, but clearly the downfall of the bank, the reason it had to be closed, was that it could not respond to depositors’ withdrawal requests.”

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

“We are very focused right now on stabilizing the banking system and building confidence, and I think there will be plenty of time that is appropriate to review what has happened and determine whether any regulatory changes or monitoring are needed or not,” she said.

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

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

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