Top U.S. economic policymakers appeared to be speaking with one voice on Wednesday when Federal Reserve Chairman Jay Powell and Treasury Secretary Janet Yellen separately reassured depositors that their money was safe.
But minutes later there was a sell-off in bank shares, reflecting confusion among investors about how far the government was willing to go to protect those depositors.
Yellen Bill Hagerty, a Republican senator from Tennessee, had asked if the Biden administration was considering a unilateral guarantee for all bank deposits — even those above the current $250,000 limit for federally insured savings. She replied that the American authorities would not go that far.
“I haven’t considered or discussed anything having to do with general insurance or warranties,” she said.
The market selloff following Yellen’s remarks highlights lingering fears over the fate of uninsured deposits at smaller regional banks two weeks after the collapse of Silicon Valley Bank and Signature Bank. Investors and depositors have latched onto every word spoken by policymakers for clues as to how ready the government is to intervene.
“What Yellen and Powell are trying to do what’s hard is to calibrate what they’re saying so that if it blows up they’re not committed to doing a lot of unnecessary things, recognizing that if it gets worse obviously we’re going to have to do more,” said David Wessel, senior fellow in economic studies at the Brookings Institution.
The US Treasury and the Fed made the implicit assumption that authorities would step in to protect Americans’ savings and prevent a broader banking crisis when they introduced a liquidity facility to help prop up struggling banks to generous conditions and to save depositors uninsured to the SVB and signed.
But regulators have refrained from supporting an explicit guarantee for all deposits in the country, or even an increase in the limit of insured deposits. These more sweeping measures would likely require the politically thorny process of securing congressional approval.
“Certainly the way we think about deposit insurance following Dodd-Frank is that it requires congressional action for the [Federal Deposit Insurance Corporation] to provide a comprehensive and universal guarantee of all deposits,” said Sarah Binder, a professor at George Washington University, referring to regulations passed in the wake of the 2008 financial crisis. For now, the Biden administration is always committed to resolving individual bank issues on a case-by-case basis.
At an American Bankers Association rally on Tuesday, Yellen said “similar actions” to those taken with SVB and Signature “might be warranted if smaller institutions experience deposit runs that pose a risk of contagion “, contributing to a rally in bank stocks. Then came his remarks in the Senate on Wednesday, and the market sell-off.
On Thursday, this time before the House of Representatives, Yellen tweaked his testimony to offer a comparable response to his remarks two days earlier, again appeasing investors.
“We used important tools to act quickly to prevent contagion. And these are tools that we could reuse,” she said, adding, “We would certainly be prepared to take additional measures if necessary. »
Although critics suggested that Yellen’s comments contradicted or clashed with those of Powell, most economic policy experts in Washington dismissed any suggestion of a chasm between them regarding the response to the crisis. Powell’s statements on deposit security as a whole are based on confidence in the Fed’s easing power, while he did not directly address the narrower issue of guarantees for uninsured accounts.
“I don’t think there’s a difference between what Powell and Yellen said on the merits [but] I think they haven’t fully articulated a policy yet,” says Michael Strain, an economist at the American Enterprise Institute, a conservative think tank.
Christina Skinner, an expert in financial regulation and central banking at the University of Pennsylvania, said: “In my view, they both serve the same purpose – to quell panic and escape.”
However, some have blamed the mixed messages from Washington for fueling market turbulence.
“The longer the uncertainty persists, the more permanent the damage is for smaller banks and the harder it will be to bring their customers back,” Bill Ackman, activist investor and managing director of Pershing Square Capital, said on Twitter.
Andrew Brenner of National Alliance Securities accused Yellen of “dithering” on the filing issue.
Wessel added, “I would say that wasn’t the shrewdest communication from the Treasury.”
After a meeting of the Financial Stability Supervisory Board on Friday afternoon, U.S. regulators and officials including Yellen and Powell said the banking system remained “healthy and resilient” – amid some comfort that deposit flows had stabilized and the crisis was confined to a few institutions.
A person familiar with the thinking of the Biden administration said Friday that it does not consider an expansion of deposit insurance “necessary” because it already has “tools” to support community banks.
The White House said: “Since our administration and regulators took decisive action last weekend, we have seen deposits stabilize at regional banks across the country and, in some cases, outflows have slightly reversed.”
But if tensions in the banking sector continue or worsen, the vagueness around who uninsured deposits might be protected could become increasingly troublesome.
“I think the biggest problem is the one that policymakers always have at a time like this: how do you try to restore confidence in the banking system without exaggerating what you know, or saying something you’re going to regret. three days later? when something blows up? I think they’re all struggling with that,” Wessel said.