WASHINGTON (AP) — Treasury Secretary Janet Yellen offered firm and optimistic assurances to shaken bank depositors and investors on Thursday, even as U.S. financial institutions and European agencies ordered new bailout efforts following the second largest banking meltdown in US history.
Questioned closely, sometimes aggressively, Yellen told senators during a Capitol hearing that the U.S. banking system “remains strong” and that Americans “can be confident” about the safety of their deposits.
His remarks, amid growing concerns about the health of the global financial system, were an effort to signal to markets that there would be no wider contagion. the collapse of Silicon Valley Bank in California and Signature Bank in New York.
At the end of his testimony, another major institution, First Republic Bank, received an emergency injection of $30 billion in deposits from 11 banks, according to the Treasury. And in Europe a few hours earlier, Credit Suisse, Switzerland’s second largest lender, has secured a promise from the Swiss central bank of a loan of up to 50 billion francs ($54 billion).
Wall Street rallied on rescue news.
Republican senators have blamed much of the blame for the problems on Democratic President Joe Biden’s administration.
“The reckless tax and spending program that was imposed by Congress” has contributed to record inflation that the Federal Reserve must offset by raising interest rates, said Sen. Mike Crapo of Idaho. And these rising rates have caused problems for banks – as well as ordinary citizens.
Republicans also questioned Biden’s assurances that taxpayers would not bear the brunt of the pledge to return depositors whole.
Yellen resisted that scenario, though she said, “We certainly need to carefully analyze what happened to trigger these bank failures and look at our rules and supervision” to prevent them from happening again. She defended the government’s argument that taxpayers won’t end up paying the cost of protecting uninsured money at Silicon Valley and Signature.
The Treasury secretary was the first administration official to confront lawmakers over the decision to protect uninsured money in the two failed regional banks, a decision that some have called a bank “bailout”.
“The government has taken decisive and aggressive action to build public confidence” in the US banking system, Yellen testified. “I can reassure committee members that our banking system remains strong and that Americans can be confident that their deposits will be there when they need them.”
It’s been a whirlwind week for markets around the world on concerns that banks could buckle under the weight of the fastest interest rate hikes in decades, increases intended to stem rising inflation on consumer goods.
In less than a week, Silicon Valley Bank, based in Santa Clara, Calif., filed for bankruptcy after depositors rushed to withdraw cash amid concerns over the bank’s health. Then regulators convened over the weekend and announced that New York-based Signature Bank had also failed. They said all depositors, including those with uninsured funds over $250,000, would be protected by federal deposit insurance.
The Department of Justice and the Securities and Exchange Commission have since launched investigations in the Silicon Valley Bank collapse, and President Joe Biden called on Congress to tighten rules on regional banks.
White House press secretary Karine Jean-Pierre said Thursday, “There are things we can do in the administration, but to really address this issue, we need to act. Congress must act.
Thursday’s hearing, originally scheduled to deal with Biden’s budget proposal for the fiscal year beginning next October, came after the sudden collapse of Silicon Valley, the nation’s 16th-largest bank and a go-to financial institution for tech entrepreneurs. While lawmakers asked Yellen about the federal deficit and upcoming debt ceiling negotiations, many focused instead on the bank failures and who was to blame.
The Biden administration’s “handling of the economy has contributed to this,” insisted Sen. Tim Scott, R.S.C. “I plan to hold regulators accountable.”
Sen. Mark Warner, D-Va., asked, “Where were the regulators in all of this?”
“Nerves are definitely frayed right now,” said Sen. Ron Wyden, D-Ore., who chairs the committee. “One of the most important steps Congress can take now is to ensure that there are no questions about the full faith and credit of the United States,” he said, referring to raising the federal debt ceiling.
Sen. Mike Crapo of Idaho, the top Republican on the committee, said “I am concerned about the precedent of guaranteeing all deposits,” calling the federal bailout action a “moral hazard.”
Yellen said on CBS’ “Face the Nation” last Sunday that a bank bailout was not on the table.
“We’re not going to do this again,” she said, referring to the government’s response to the 2008 financial crisis, which led to massive government bailouts for major US banks.
Yellen, a former Federal Reserve chairman and former chairman of the San Francisco Federal Reserve during the 2008 financial crisis, was a leading figure in last weekend’s resolution, which was designed to prevent a systemic banking problem. wider.
“This week’s actions demonstrate our strong commitment to ensuring the safety of depositors’ savings,” she said.
Sen. Sherrod Brown, D-Ohio, compared the bank meltdown to lobbying for rail industry deregulation that Democrats say contributed to the East Palestine train derailment that rocked a community from Ohio. “We also see aggressive lobbying like this from banks,” he said.
In Europe, the unrest at Credit Suisse has heightened concerns about the global financial system.
The Swiss giant had been in trouble long before US banks collapsed, but Wednesday’s announcement that the bank’s largest shareholder would no longer inject money sent European bank stocks plunging. On Thursday, they rose after action by the Swiss Central Bank.
Regulators in the United States and abroad are trying to reassure depositors that their money is safe. They “don’t want anybody to be the person who’s sitting in a dark room or a dark cinema and screaming fire, because that’s what causes a rush to exit,” said Russ Mould, director of investments from the AJ Bell online investment platform.
Despite the banking turmoil, the European Central Bank raised interest rates by half a percentage point in its latest effort to rein in stubbornly high inflation, saying Europe’s banking sector is “resilient”, with strong finances and plenty of cash on hand.
ECB President Christine Lagarde said the central bank would provide additional support to the banking system if needed. She said the banks “are in a completely different position from 2008” due to the guarantees added after the financial crisis.
ECB Vice-President Luis de Guindos also said Europe’s exposure to Credit Suisse, which is outside the European Union’s banking supervisory structure, was “quite limited”.
The Swiss bank, which has seen its shares decline for years, is scrambling to raise funds from investors and roll out a new strategy to overcome a series of problems, including poor hedge fund bets, repeated reshuffling of its senior management and a spy scandal involving its Zurich rival UBS.
Associated Press writers Dave McHugh in Frankfurt, Germany, and Jamey Keaten in Geneva contributed to this report.
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