The U.S. is ready to protect smaller banks if necessary, Yellen says

Washington – Treasury Secretary Janet L. Yellen expressed confidence in the nation’s banks on Tuesday, but said the Biden administration and federal regulators are willing to take additional steps to protect smaller financial institutions as they work to contain the fallout from fears about the stability of the banking system. .

As the U.S. financial system faces its worst turmoil in more than a decade, Ms. Yellen said the actions the administration and federal regulators have taken so far have helped restore confidence. But policymakers were focused on making sure the broader banking system remained safe, he said.

“Our intervention is necessary to protect the broader American banking system,” Ms. Yellen said in remarks before the American Bankers Association, the industry’s leading lobbying group. “Similar actions may be warranted if smaller firms experience deposit runs that pose a risk of contagion.”

He added: The situation is improving. And the US banking system is in good shape.

However, Ms. Yellen underscored the seriousness of the current situation. He said the pressures facing the banking system, while not as bad as the 2008 financial collapse, were still “critical” and pointed to the risk of contagion of bank runs.

“It’s different than 2008; 2008 was a credit crisis,” Ms. Yellen said. “What we’re seeing are contagion bank runs.”

In response to a question from Rob Nichols, chief executive of the American Bankers Association, Ms. Yellen said she did not want to “speculate” on what regulatory changes would be necessary to prevent a similar situation from happening again.

“There is time to assess whether some changes in monitoring and regulation are needed to address the root causes of the crisis,” he said. “My focus is on stabilizing our system and restoring depositor confidence.”

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His comments came as government officials mulled more options to stem the flow of deposits from small and medium-sized banks, and heightened concerns that more needs to be done.

Ms. Yellen said recent federal actions after the failures of Silicon Valley Bank and Signature Bank this month show the Biden administration is committed to protecting the integrity of the system and ensuring depositors are safe.

In the past 10 days, federal regulators have used emergency action to guarantee deposits at Silicon Valley Bank and Signature Bank, and launched a new Federal Reserve program to ensure other banks get funding to meet their depositors’ needs. Major banks deposited $30 billion in First Republic.

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“The situation demanded a quick response,” Ms. Yellen said. “In the days that followed, the federal government delivered just that: decisive and forceful action to strengthen public confidence in the American banking system and protect the American economy.”

Despite those efforts, the central bank’s campaign to raise interest rates to control inflation has exposed weaknesses in regional banks’ balance sheets, spooked investors and raised fears that deposits are not safe.

Ms. Yellen said the financial system is much stronger than it was 15 years ago and called for an examination of how recent bank failures occurred.

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“In the coming weeks, it will be vital for us to get a full account of what happened in these bank failures,” he said. “We need to review our current regulatory and supervisory regimes and consider whether they are appropriate for the risks facing banks today.”

The Federal Reserve, the primary regulator for banks, is reviewing what happened at Silicon Valley Bank and looking more closely at supervision and regulation.

Uncertainty about regional banks has also led to concerns that the industry will become more consolidated among large banks.

Mrs. Yellen made clear Tuesday that banks of all sizes matter, highlighting how smaller banks have closer ties to communities and bring competition to the system.

“Big banks play an important role in our economy, but so do small and medium-sized banks,” he said. “These banks are heavily involved in traditional banking services that provide vital credit and financial assistance to families and small businesses.”

The Treasury secretary added that the fortunes of the US banking system and its economy are inextricably linked.

“You have to be sure that we will be vigilant,” he said.

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