Janet Yellen will signal more of the US government to deposit in smaller American banks if necessary, a change that seeks to protect parts of the country’s banking system struggling in the recent financial crisis.
Amid evidence that panicked depositors are pulling savings from regional banks, the US Treasury secretary will say that the guarantee offered to all depositors at the failed Silicon Valley Bank can be replicated in other institutions if necessary.
“The measures we’re taking are not focused on helping a particular bank or class of banks,” Yellen said in a speech at the American Bankers Association on Tuesday.
“Our intervention is necessary to protect the broader U.S. banking system. And the same action can be taken if small institutions experience deposits that pose a risk of contagion.
The US Treasury is working with the Federal Reserve and the Federal Deposit Insurance Corporation to guarantee all deposits, including uninsured ones, at Silicon Valley Bank and Signature Bank, which both failed this month. In addition, the Fed announced new facilities to boost liquidity for struggling banks.
Yellen will also defend the “resolute” and “robust” steps taken by regulators to prevent a broader banking crisis in the US, even if the problems affecting smaller institutions are not resolved. A $30bn lifeline put together by Wall Street bank executives – and backed by the US government – last week failed to capture the sale of First Republic Bank shares.
However, Yellen will suggest the US is relatively comfortable with market developments in recent times. “The situation has stabilized. And the US banking system remains in good shape,” he said. “Fed facilities and discount window loans are used to provide liquidity to the banking system. Aggregate deposit flows from regional banks have stabilized.
“We are squarely focused on doing our job,” he will add. “And you can rest assured that we will remain vigilant.”
The Treasury Secretary will also emphasize the importance of small and medium-sized banks to the US economy. The big concern these days is that the current crisis will strengthen larger financial institutions at the expense of smaller ones.
“Big banks play an important role in our economy, but so do small and medium-sized banks,” Yellen said. “These banks are heavily involved in traditional banking services that provide 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 suggest the Biden administration expects additional actions that will focus on propping up individual banks that may be struggling. However, US officials are also debating whether to take additional steps to restore confidence, including increasing or removing the $250,000 cap on deposits insured by the FDIC.
Congressional support will be needed for the measure unless Biden administration officials find a way to implement the measure through executive action.