Treasury Secretary Janet Yellen insisted that the US banking system is “safe” and “sane” in her first public testimony since the fall of Silicon Valley Bank before the Senate Finance Committee.
In words intended to calm nervous depositors and investors, the secretary insisted that the government’s emergency measures managed to stabilize the banking sector.
“Customers were able to access all the money in their deposit accounts Monday morning so they could do their payroll and pay their bills,” Yellen said.
“This week’s actions demonstrate our determination and commitment to ensuring our financial system remains strong and depositors’ savings remain safe.”
Treasury Secretary Janet Yellen insisted that the US banking system is “safe” and “sane” in her first public testimony since the fall of Silicon Valley Bank before the Senate Finance Committee.
On Sunday night, the Treasury, Federal Reserve and FDIC announced they would protect all SVB deposits, even those above the $250,000 limit, drawing criticism from Republicans and some Democrats who saw it as a bailout.
But Yellen insisted that “taxpayer money is not being used or put at risk,” as the money will be paid out through the FDIC’s insurance fund.
But most taxpayers are bank depositors, and a portion of their deposits goes into the FDIC’s insurance fund, and that money is used to pay depositors at both Silicon Valley Bank and Signature Bank.
The Treasury’s preemptive promise of $25 billion in taxpayer money to help other institutions cover a rush of withdrawals has also drawn attention. This recently announced bank term financing program offers one-year loans to banks that offer “high quality securities” as collateral.
Yellen insisted that “taxpayer money is not being used or put at risk” as the money will be paid out through the FDIC’s insurance fund.
The trap for the taxpayer is that the Treasury will value the securities used as collateral ‘at par’, that is, for what they were purchased, instead of what they are worth today, which in most cases is less. That means if banks tap into the fund but can’t service the debt, the Treasury (and taxpayers) could be left with a large deficit.
As some on the left push for new banking regulations and bring back the Dodd-Frank restrictions that were undone in 2018, moderates and some Republicans blame regulators.
Sen. John Cornyn, R-Texas, noted during the hearing that the arguments that bank regulators are more concerned with managing climate risk than oversight “are right.”
‘Where were the regulators?’ asked Sen. Mark Warner, D-Va.
Senator Mike Crapo, a senior member of the committee, said he was “concerned about the precedent of guaranteeing all deposits and the expectation of the market moving forward.”
He called the move a “moral hazard” that, like inflation, “is not easy to contain.”
Crapo also said that inflation played an important role in the current situation, as banks mismanaged the risk of rising interest rates.
Yellen did not deny his claim. “It is my understanding that the bank, in order to meet liquidity needs, had to sell assets that it expected to hold until maturity due to increases in interest rates…they had lost market value.”
Yellen, who was there to discuss President Biden’s new budget proposal but was sidelined with questions about the recent banking collapse, also said she doesn’t think Biden’s spending was the main contributor to inflation.
‘Would you agree that those are the three main causes of inflation? Deficit spending, high energy costs and supply disruptions?’ asked Sen. Ron Johnson, Republican of Wisconsin.
“I don’t think deficit spending is one of the main causes of inflation,” Yellen responded.
Sen. Bill Cassidy, R-Los Angeles, used his line of questioning to point out that Biden did not propose any ideas to address the solvency of Social Security in his new budget proposal. The senator noted that Biden proposed $4.5 trillion in new taxes in the budget, none of which went to the popular senior citizen program.
‘Why doesn’t the president care?’ Cassidy said. “He worries a lot,” Yellen said.
‘So where is your plan?’
“He’s ready to work with Congress,” Yellen said.
Cassidy responded, ‘That’s a lie. A bipartisan group of senators has repeatedly requested to meet with him.
Senator Chuck Grassley, R-Iowa, told Yellen that the president needs to stop “demagogy” on Social Security and Medicare if he realizes that these programs will be insolvent a decade from now if they are not done. reforms.
Biden has repeatedly used Social Security and Medicare as a political stick, saying Republicans want to cut the programs.
