Janet Yellen is further signaling US support for deposits in smaller banks

Janet Yellen said the U.S. government is backing deposits into smaller U.S. banks, if necessary, as it seeks to protect parts of the nation’s banking system that have struggled in the recent financial turmoil.

The U.S. Treasury secretary said guarantees offered to all depositors at a failed Silicon Valley bank could be replicated at other institutions if needed, after signs that panicked depositors were pulling savings out of regional banks in recent days.

“The actions we’ve taken are not focused on helping specific banks or classes of banks,” Yellen said in a speech to the American Bankers Association on Tuesday.

“Our intervention is necessary to protect the broader U.S. banking system. Similar measures may be warranted if smaller institutions experience deposit runs that pose contagion risk.

The U.S. Treasury, along with the Federal Reserve and the Federal Deposit Insurance Corporation, guaranteed all deposits at Silicon Valley Bank and Signature Bank, which failed this month. Additionally, the central bank announced a new facility to boost liquidity for struggling banks.

While the problems affecting smaller firms have yet to be resolved, Yellen supported the “decisive” and “strong” steps taken by regulators to avoid a broader banking crisis in the United States. A $30 billion lifeline thrown out by Wall Street bank chief executives β€” and cheered by the U.S. government β€” initially failed to stem a sharp selloff in First Republic Bank’s stock.

However, Yellen suggested that the US has been comforted by market developments in recent days. β€œThe situation is improving. And the US banking system is doing well,” he said. “Deposit facility and discount window lending are working to provide liquidity to the banking system. Gross deposit outflow from regional banks has remained stable.

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“We are fully focused on doing our job,” he added. “You must be sure we will be vigilant.”

The Treasury secretary also emphasized the importance of small and medium-sized banks to the U.S. economy. A major concern in recent days is that the current crisis will strengthen large financial institutions at the expense of smaller financial institutions.

“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 vital credit and financial assistance to families and small businesses. They increase competition in the banking industry and have specialized knowledge and expertise in the communities in which they invest.

Yellen’s comments suggest the Biden administration expects more measures focused on propping up struggling private banks. However, U.S. officials are debating whether to take additional steps to restore confidence, including increasing or eliminating the $250,000 limit on deposits insured by the FDIC.

Unless Biden administration officials find a way to take action through executive action, such action would require congressional support.

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