Treasury Secretary Janet Yellen has made an embarrassing and confusing flip-flop on which banks do and don’t get a lifeline, this time reassuring the world that the US financial system is stable thanks to the government’s reversal to protect even more uninsured deposits.
In a speech before the American Bankers Association on Tuesday, Yellen said the US government is prepared to bail out backstop deposits at other banks if needed, totally backtracking on her March 16 comments that deposits would only be guaranteed if they otherwise “create system risk and significant economic and financial consequences.”
The little old lady was once again put in front of the podium to quell persistent concerns that clients are going to withdrawal deposits from more regional banks, insisting that the same helping hand given to Silicon Valley Bank will also be extended to other institutions. “The steps we took were not focused on aiding specific banks or classes of banks,” she said in her speech. “Our intervention was necessary to protect the broader US banking system, and similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”
People familiar with the matter told Bloomberg that the US government is in the midst of devising how to temporarily extend the Federal Deposit Insurance Corp. coverage to all deposits, as well as those surpassing the $250,000 maximum. However, officials concede the move might face difficulty gaining support without formal approval from a strongly divided Congress. “We will use the tools we have to support community banks,” alluded White House spokesman Michael Kikukawa, stopping short of unveiling if such measures are actually being analyzed.
In light of the SVB and Signature bank collapses, the FDIC, along with the Federal Reserve and the Treasury, rapidly launched the Bank Term Funding Program and expanded the central bank’s discount window. Wall Street, meanwhile, pledged $30 billion in deposits for First Republic Bank to keep the financial system from further ripping at the seams.
“The situation is stabilizing. And the U.S. banking system remains sound,” Yellen insisted. “The Fed facility and discount window lending are working as intended to provide liquidity to the banking system. Aggregate deposit outflows from regional banks have stabilized.” She also unveiled that the Fed is looking at ways to prevent such a scenario from occurring again.
“There’s time to evaluate whether some adjustments are necessary in supervision and regulation to address the root causes of the crisis,” Yellen told the American Bankers Association. “I don’t want to speculate at this point on what those adjustments might be. What I’m focused on is stabilizing our system and restoring the confidence of our depositors.”
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