The US banking system is sound, but not all deposits are guaranteed, Yellen tells senators

WASHINGTON, March 16 (Reuters) – The U.S. banking system is stable and Americans can feel confident that their deposits will be there when they need them, Treasury Secretary Janet Yellen said on Thursday, although she ruled out recent emergency measures following two major bank failures. All deposits now have a blanket government guarantee.

In her first public comments since emergency measures over the weekend to ensure that depositors at Silicon Valley Bank ( SIVB.O ) and Signature Bank ( SBNY.O ) were not covered, Yellen was pressed if all uninsured deposits were guaranteed.

“Only one bank gets that treatment,” he told Republican Senator James Lankford, if the Federal Reserve, the Federal Deposit Insurance Corp. and “I fail to protect uninsured deposits. Creating systemic risk and significant economic and financial consequences.”

His comments were the first public sign of regulators’ views on the limits of the extraordinary guarantee over the weekend that ensured tens of billions in uninsured deposits in Silicon Valley and Signature were not lost.

Ahead of that exchange, Yellen highlighted the “decisive and strong” emergency measures taken on Sunday, which she said helped restore depositor confidence and prevented excessive runs on banks.

“I can assure members of the committee that our banking system is sound, and Americans can feel confident that their deposits will be there when they need them,” Yellen said in remarks.

“This week’s actions demonstrate our steadfast commitment to ensuring depositors’ savings are safe.”

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

In their cases, he said, “the chances of contagion where other banks would be considered bad and affect the runs seemed very high, and the consequences would be very serious.”

More than $9.2 trillion in U.S. bank deposits were uninsured at the end of last year, according to Federal Reserve data. Those uninsured deposits are not evenly distributed across the country, FDIC data show.

‘No more than that’

A previously scheduled hearing to discuss the Biden administration’s budget plan gave the first public account last Friday of a member of the board of bank supervisors who orchestrated the bailout following Silicon Valley’s failure. The signature was seized by regulators over the weekend.

The emergency measures extended beyond the depositor’s back, including improvements to banking sector liquidity orchestrated by the central bank. The moves were greeted with relief and surprise on Capitol Hill, where Democrats control the Senate and Republicans hold the House of Representatives.

Many lawmakers bemoaned the failure of cotton regulators to deal with the damage before banks suddenly collapsed.

“This administration bears a great deal of responsibility for the bank failures we’ve had,” Republican Senator Charles Grassley told reporters outside the hearing, adding that regulators in California were “not on top of it.”

Yellen attributed Silicon Valley’s decline to an inability to meet depositors’ demands for their money after the Federal Reserve raised interest rates last year, reducing the value of bond investments relied on to fund customer withdrawals. He pointed to the high volume of uninsured deposits in Silicon Valley as an aggravating factor.

“There is liquidity risk in this situation,” Yellen told the group. “It remains to be seen carefully what happened at the bank and what triggered this problem, but clearly, the downfall of the bank, the reason it had to close, was that it could not meet the withdrawal demands of depositors.”

He made no reference in prepared comments to the situation surrounding Credit Suisse, which saw its shares fall on Wednesday before regulators promised a liquidity lifeline to the major Swiss lender.

“We are now very focused on stabilizing the banking system and increasing confidence, and I think there will be enough time to see what has happened and consider whether or not regulatory or supervisory changes are needed.” she said.

“But for now, I want to restore the firm confidence of American banks.”

Andrea Shalal reports; Editing by Kenneth Maxwell, Nick Zieminski and Marguerita Choi

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