Janet L. Yellen, Chair of the Board of Governors of the Federal Reserve System. Washington, D.C., on February 3, 2014.
Big news here, even if there isn’t yet an explicit guarantee. Treasury Secretary Yellen indicated policymakers may intervene to protect depositors at smaller banks. It is also reported that US officials are studying ways to temporarily extend FDIC insurance to all depositors. This news should be well received by the market and banks. James Politi reports in the Financial Times:
Janet Yellen will signal further US government backing for deposits at smaller American banks if needed, a shift that seeks to protect parts of the country’s banking system struggling in the recent financial turmoil.
After signs that panicked depositors pulled savings out of regional banks in recent days, the US Treasury secretary will say guarantees offered to all depositors at the failed Silicon Valley Bank could be replicated at other institutions if needed.
“The steps we took were not focused on aiding specific banks or classes of banks,” Yellen is expected to say in a speech to the American Bankers Association on Tuesday.
“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.”
The US Treasury worked with the Federal Reserve and the Federal Deposit Insurance Corporation in providing guarantees for all deposits, including uninsured ones, at Silicon Valley Bank and Signature Bank, which both failed this month. In addition, the Fed announced a new facility to boost liquidity for struggling banks.
Yellen will also defend the “decisive” and “forceful” steps taken by regulators to avert a broader banking crisis in the US, although the problems afflicting smaller institutions are far from resolved. A $30bn lifeline put together by Wall Street bank chief executives — and cheered on by the US government — initially failed to arrest a sharp sell-off in the shares of First Republic Bank.
However, Yellen will suggest the US is relatively comforted by market developments in recent days. “The situation is stabilising. And the US banking system remains sound,” she will say. “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 stabilised.”
“We are squarely focused on doing our job,” she will add. “And you should rest assured that we will remain vigilant.”
The Treasury secretary will also stress the importance of small and midsized banks to the US economy. A big concern in recent days has been that the current crisis would strengthen larger financial institutions at the expense of smaller ones.
Read more here.
