A week after the second-largest bank collapse in U.S. history, Treasury Secretary Janet Yellen told the Senate Finance Committee on Thursday that the nation’s banking system “remains sound” and Americans “can feel confident” about their deposits.
Her remarks, coming against the backdrop of deepening concerns about the health of the global financial system, were an effort to signal to markets that there would be no broader contagion from the collapse of Silicon Valley Bank in California and Signature Bank in New York.
Facing fierce questioning by lawmakers on how Federal Reserve interest rates contributed to the bank failures and whether taxpayers would bear the brunt of the commitment to make depositors at the banks whole, Yellen stressed the need for the federal government to act to assure stability in the market.
“We certainly need to analyze carefully what happened to trigger these bank failures and examine our rules and supervision” to prevent failures from happening again, Yellen told the committee.
Yellen was the first Biden administration official to face lawmakers over the decision to protect uninsured money at two failed regional banks, a move that some have criticized as a bank “bailout.”
“The government took decisive and forceful actions to strengthen public confidence” in the U.S. banking system, Yellen testified. “I can reassure the members of the committee that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them.”
Yellen also defended the government’s argument that taxpayers will not bear the cost of protecting uninsured money at two failed regional banks.
The week has been a whirlwind for markets globally on worries about banks that may be bending under the weight of the fastest set of hikes to interest rates in decades. In Europe, troubles at Credit Suisse, Switzerland’s second-largest lender this week prompted the Swiss central bank to agree to loan Credit Suisse up to 50 billion francs ($54 billion).
In less than a week, Silicon Valley Bank, based in Santa Clara, California, failed after depositors rushed to withdraw money amid anxiety over the bank’s health. Then, regulators convened over the weekend and announced that New York-based Signature Bank also failed. They ensured all depositors, including those holding uninsured funds exceeding $250,000, were protected by federal deposit insurance.
The Justice Department and the Securities and Exchange Commission have since launched investigations into the Silicon Valley Bank collapse.
Thursday’s hearing, meant to address President Joe Biden’s budget proposal, came after the sudden collapse of the nation’s 16th-biggest bank and go-to financial institution for tech entrepreneurs. While lawmakers questioned Yellen on the deficit and upcoming debt ceiling negotiations, many focused instead on what role regulators played in the bank failures.
The Biden administration’s “handling of the economy contributed to this,” insisted Sen. Tim Scott, R-S.C. “I plan to hold the regulators accountable.”
Sen. Mark Warner, D-Va., wondered aloud, “Where were the regulators in all of this?” and called for accountability in the bank run.
“Nerves are certainly frayed at this moment,” said Sen. Ron Wyden, D-Ore., who chairs the committee. “One of the most important steps the Congress can take now is make sure there are no questions about the full faith and credit of the United States,” he said, referring to raising the debt ceiling.
Sen. Mike Crapo of Idaho, the committee’s top Republican, said, “I’m concerned about the precedent of guaranteeing all deposits,” calling the federal rescue action a “moral hazard.”