WASHINGTON — Secretary of the Treasury Janet Yellen sought to reassure markets and lawmakers on Thursday that the federal government is committed to protecting U.S. bank deposits following the failures of Silicon Valley Bank and Signature Bank over the weekend.
“Our banking system remains strong, and Americans can be confident that their deposits will be there when they need them,” Yellen said during testimony before the Senate Finance Committee.
When questioned, however, Yellen admitted that not all depositors will be protected beyond the FDIC insurance limits of $250,000 per account as they did for customers of the two failed banks.
A Silicon Valley Bank office is seen in Tempe, Arizona on March 14, 2023.
Rebecca Noble | AFP | Getty Images
Yellen has been at the center of federal emergency efforts last week to recover deposits from account holders at two failed banks, California-based SVB and New York-based Signature Bank.
The majority of SVB’s clients were small technology companies, venture capitalists and entrepreneurs who used the bank for day-to-day cash management to run their businesses. These clients had $175 billion on deposit with tens of millions in individual accounts. That left SVB with one of the highest shares of uninsured deposits in the country when it collapsed, with 94% of its deposits exceeding the FDIC’s $250,000 insurance limit, according to S&P Global Market Intelligence Data from 2022.
US banking regulators announced a plan Sunday to fully insure all deposits at the two failed banks, including those above the $250,000 limit covered by traditional FDIC insurance. Additional protection will be paid on a special fund consisting of fees levied on all institutions insured by the FDIC.
Additionally, the Federal Reserve has relaxed its borrowing guidelines for banks seeking short-term funding through its so-called discount window. It has also set up a separate unlimited facility to offer one-year loans on more flexible terms than usual to support struggling banks in the face of increased cash withdrawals. Both programs are funded by industry royalties, not taxpayers, the Biden administration stressed.
“This will help financial institutions meet the needs of all their depositors,” Yellen said. “This week’s actions demonstrate our strong commitment to ensuring the safety of depositors’ savings.”
Democrats and Republicans in Congress have broadly backed the emergency measures taken last week. But as markets rallied somewhat, lawmakers asked Yellen on Thursday whether backstops for big banks would become a new normal, and what that might mean for community lenders.
“I’m concerned about the precedent of guaranteeing all deposits and market expectations,” Sen. Mike Crapo, R-Idaho, a committee filing member, said in his opening remarks.
People line up outside a Silicon Valley Bank office on March 13, 2023 in Santa Clara, California.
Justin Sullivan | Getty Images
Republican Sen. James Lankford of Oklahoma lobbied Yellen on the extent of the application of backstops on uninsured deposits across the banking industry.
“Will deposits at all community banks in Oklahoma, regardless of size, be fully insured now? Lankford asked. “Will they get the same treatment that SVB just got, or Signature Bank just got?”
Yellen acknowledged that they would not.
Uninsured deposits, she said, would only be covered if “the lack of protection for uninsured depositors creates systemic risk and significant economic and financial consequences.”
Lankford said the impact of this standard would make smaller banks less attractive to depositors with more than $250,000, the current FDIC insurance threshold.
US Treasury Secretary Janet Yellen answers questions about the Biden administration’s plans following the collapse of three US lenders, including Silicon Valley Bank and Signature Bank, as she testifies before a committee hearing Senate Finance on US President Joe Biden’s proposed budget request for fiscal year 2024, on Capitol Hill in Washington, March 16, 2023.
Mary F. Calvert | Reuters
“I’m afraid you’re encouraging someone who has a big deposit in a community bank to say, ‘We’re not going to cure you, but if you go to one of our favorite banks, we’ll do you all. entire.'”
“It’s definitely not something we encourage,” Yellen replied.
Members of Congress are currently weighing a number of legislative proposals intended to prevent the next Silicon Valley Bank-like failure.
One of them is an increase in the FDIC insurance limit of $250,000, which many seniors Democratic lawmakers asked following the collapse of SVB.
Following the 2008 financial crisis, Congress raised the FDIC limit from $100,000 to $250,000 and approved a plan under which larger banks contribute more to the insurance fund than smaller lenders.