US Treasury Secretary Janet Yellen ruled out expanding deposit insurance to protect savers with balances above $250,000 in the near term, comments that sparked another sell-off in smaller US bank stocks.
Speaking at a Senate hearing on Wednesday afternoon, Yellen said there could be a “reasonable discussion” of whether the current $250,000 limit for insured deposits should be lifted as part of long-term systemic reforms.
But the Treasury secretary said that amid the current turmoil, the Biden administration is not considering steps to expand deposit insurance, which would require congressional approval unless the Treasury finds a way to implement it unilaterally.
“I have not considered or discussed what to do with blanket insurance or guaranteed deposits,” Yellen said.
His comments came shortly after Jay Powell, chairman of the Federal Reserve, sought to assure Americans that their deposits were “safe” because of the actions that policymakers have taken, including facilities set up by the central bank to boost liquidity for small banks.
Yellen said that uninsured deposits above $250,000 can only be protected if a failed bank is considered a systemic risk to the financial system, as happened earlier this month with Silicon Valley Bank and Signature Bank. He said that determination would happen on a case-by-case basis.
Earlier this week, in a speech at the American Bankers Association, Yellen said the US government was prepared to step in for individual banks if necessary. “Similar actions can be taken if small institutions experience deposits that lead to the risk of contagion,” he said.
Yellen’s comments came on another brutal day for investors in smaller US banks. Shares of the lender had fallen on Wednesday, but the decline accelerated after the Treasury secretary’s testimony in the afternoon.
The KBW Bank index, which tracks shares in 24 large and midsized banks, dropped almost 5 percent, reversing all the gains made after Yellen’s comments in the banks’ association on Friday.
The decline weighed on the broader S&P 500, with banks making up seven of the benchmark index’s 10 worst performers. First Republicans led the decline, down 15 percent. Comerica, M&T Bank and US Bancorp each fell more than 7 percent.
Shares of PacWest, a Beverly Hills-based bank, fell 17 percent, after it said it had lost 20 percent of its deposits this year and announced it had bolstered access to cash by tapping a $1.4bn credit facility from an investment firm. .
Meanwhile, First Republic said executives will not be paid bonuses for 2023 – while its founder and chief executive will stop receiving salaries – as the lender tries to regain investor confidence after its shares fell more than 85 percent in a month.
Fitch, the rating agency, cut the San Francisco-based bank into junk territory, warning: “[First Republic] currently operating at a net loss that is unsustainable in the long term absent balance sheet restructuring.
On Wednesday afternoon, Citigroup chief executive Jane Fraser said in an interview at the Economic Club of Washington DC that the US financial system remains healthy, outside of some “idiosyncratic” events. Fraser said the regulator had acted quickly given the speed at which Silicon Valley Bank deteriorated and thought the big banks’ plan to deposit $30bn into First Republic had been effective. When asked if Citi was interested in buying First Republic, Fraser said no.
“There are pockets of problems,” Fraser said. “It’s not a credit problem, and it’s good that the big banks are coming together to solve it.”
Democratic and Republican lawmakers, as well as some banking lobbyists, executives and economists, have asked the US to increase or delay the $250,000 limit on insured deposits in order to prevent more deposit flights from small and regional banks.
However, there is no clear bipartisan consensus in Congress for the measure. Many Republicans are wary of lifting restrictions on grounds that will expand the role of the federal government in the banking system and can result in more fees for banks – which guarantee deposit funds – which can be passed on to consumers.
Meanwhile, some Democrats have concerns about moral hazard, and worry that it could reward risky behavior by banks.
Despite Yellen’s comments, the debate over whether to expand bank deposit insurance in the US is expected to continue, especially if there are more deposit flights due to the current turmoil.
Additional reporting by Stephen Gandel in New York
The banks are in turmoil
The global banking system has been rocked by the collapse of Silicon Valley Bank and Signature Bank and the last-minute rescue of Credit Suisse by UBS. Check out the latest analysis and commentary here