The US Treasury Secretary welcomes government intervention to guarantee depositors’ money and says the banking system is ‘sound’.
US Treasury Secretary Janet Yellen has said the United States’ banking system is “sound”, stressing that recent US bank failures are “very different” from the global financial collapse of 2008.
Speaking at the American Bankers Association on Tuesday, Yellen said the US government’s intervention in the wake of the collapse of Silicon Valley Bank (SVB) and Signature Bank this month helped contain the fallout.
“The situation is stabilizing and the US banking system remains healthy,” Yellen said.
The US government quickly responded to the crisis – the second-largest bank failure in US history – by seizing the two banks and guaranteeing the money of all their respective depositors, even those who were uninsured.
Yellen suggested on Tuesday that the US government could continue to guarantee all deposits in case of further bank failures. “Similar actions may be warranted if smaller institutions face deposit runs that pose the risk of contagion,” she said.
Yellen added that Washington has also helped mitigate risks to the system by creating a lending initiative called the Bank Term Funding Program (BTFP) to provide additional liquidity to financial institutions and “help banks meet the needs of all their depositors”.
“Let me be clear: the government’s recent actions have demonstrated our determination to take the necessary steps to ensure that depositors’ savings and the banking system remain safe,” she said.
US regulators closed SVB on March 10 after it experienced a bank run – a rush by depositors to withdraw their money in one go. Specializing in lending to technology startups and the venture capitalists who fund them, the California-based institution had invested much of its money in US Treasury bonds, the value of which fell as interest rates rose.
A second bank, New York-based Signature, also went bankrupt.
Yellen and other US officials have tried to defend the government’s interventions amid concern and public frustration over its decision to effectively bail out financial institutions that critics say were mismanaged.
The administration of US President Joe Biden insists its recent actions do not constitute a bailout.
The reverberation of the current turmoil is being felt in banks around the world. Late last week, US banking giants pledged to deposit $30 billion to prop up a struggling California lender, First Republic Bank, a move welcomed by Washington.
The bankruptcies of SVB and Signature Bank and collapsing bank stocks had raised fears of a wider economic meltdown similar to the 2008 financial crisis. But Yellen said on Tuesday the two situations are not the same.
“We know that recent developments are very different from those of the global financial crisis,” she said.
“At the time, many financial institutions came under pressure because of their holdings of subprime assets. We don’t see that situation in the banking system today. Our financial system is also significantly stronger than it was 15 years ago. This is due in large part to post-crisis reforms that brought about stronger capital standards, among other important improvements.”
Two years after the 2008 meltdown, US lawmakers passed a sweeping Wall Street reform bill. But some of his prescriptions were reversed in 2018 with two-piece support.
Last week, Biden called on Congress to tighten regulations to hold bankrupt bank executives accountable for “mismanagement and excessive risk-taking,” including banning them from working in the industry.
“The president believes that if you’re responsible for the failure of one bank, you shouldn’t just turn around and run another,” the White House said in a statement.
