Yellen assures that the US banking system is “solid” and that savings are safe

The Secretary of the Treasury, Janet Yellen, has reiterated this Thursday before Congress the calls for calm on the US financial system. Yellen appears before a Senate committee to discuss President Joe Biden’s budget plan, but she now rules after the fall of Silicon Valley Bank and Signature Bank. In her opening statement, Yellen said: “I can assure the members of the commission that our banking system remains strong and that Americans can trust that their deposits will be there when they need them.”

Yellen has defended the guarantee for all the deposits of the two entities intervened last weekend, assuring that it allows companies to pay their payrolls and bills. “It is important to point out that with this measure, taxpayers’ money is not used or put at risk. The protection of deposits is provided by the deposit guarantee fund, which is financed with the commissions it charges banks, ”she has indicated.

It is the same message that the president, Joe Biden, already conveyed in a brief intervention last Monday. Unlike Biden, who did not answer questions, Yellen will have to face some senators who are suspicious of public support for financial institutions and who will surely be critical of the way in which the Federal Reserve has exercised supervision of medium-sized banks, in the eye of the storm.

The appearance before the Senate Finance Committee comes amid turmoil in world markets and concerns about financial stability following the rapid failure of three regional US banks and the troubles of Credit Suisse Group, which has enlisted the help of the Swiss central bank with a liquidity facility of around 50 billion Swiss francs.

In her speech, Yellen has highlighted the “decisive and forceful measures” adopted by the Treasury, the Federal Reserve and the deposit insurance fund (FDIC) to reinforce confidence in the banking system, according to the initial intervention. In her opening speech, the Treasury secretary maintains that the measures adopted by the Government demonstrate its commitment to guarantee “that depositors’ savings continue to be safe” and to allow bank clients to pay their payroll and bills .

Idaho Republican Senator Mike Crapo, who leads the Republican Party in the commission, has questioned the decision of the authorities: “I am concerned about the precedent of guaranteeing all deposits,” he said, describing the support measure as ” moral hazard”.

“Nerves are certainly on edge right now,” said Democratic Sen. Ron Wyden, chairman of the committee. “One of the most important steps that Congress can take now is to make sure that there is no question about the full faith and credit of the United States,” he said, referring to the increase in the debt ceiling, pending approval by the Congress.

Risk for First Republican Bank

Indeed, nerves continue among investors, especially with regard to medium-sized banks. First Republican Bank, the 14th largest bank in the United States, San Francisco-based First Republic Bank, remains in the spotlight and this Thursday its share price plummeted to new lows after the credit rating downgrade by S&P and Fitch . The bank most similar to SVB is looking for a way out of the crisis that could go through its sale to another entity or a capital increase. According to The Wall Street Journal, the largest US banks (among them JP Morgan, Bank of America, Wells Fargo, Morgan Stanley and Goldman Sachs) are looking to rescue the entity.

As in the case of Silicon Valley Bank, First Republican executives sold nearly $12 million in shares in the months before the bank’s stock market crashed. Its president, James Herbert, got rid of titles for an amount of about 4.5 million.

Meanwhile, Moody’s has worsened the solvency outlook for the financial sector as a whole and has placed half a dozen entities under surveillance, including the First Republican Bank, for a possible downgrade.

The FDIC, meanwhile, is still unable to find a buyer for Silicon Valley Bank or its assets nearly a week after its intervention. Some big banks that bought troubled banks in the 2008 financial crisis have since been met with lawsuits, criticism and unforeseen losses, and they also seem unwilling to come to the rescue. The less that is obtained from the sale of SVB, the more difficult it will be to fulfill the promise that taxpayers will not bear losses. Even if the liquidations are financed with a rate from the deposit guarantee fund to the banks, there is little doubt that the entities will end up passing them on to their clients, via commissions or more expensive credits.

Some senators have also warned that clients are moving deposits from small and medium-sized banks to larger ones, which they consider more secure. Yellen has stressed that the guarantee to depositors of SVB and Signature Bank was precisely to prevent further leakage of deposits from other entities.

Yellen led the San Francisco Federal Reserve during the 2008 financial crisis and is a former chair of the Federal Reserve. She on Thursday highlighted the risk that inflation poses to the US economy, apparently backing the central bank to continue raising interest rates next week.

The commission session also discussed the supervision of Silicon Valley Bank and Signature Bank and the need for legal reforms to strengthen supervision. Biden himself and numerous Democratic congressmen are calling for a tougher law, to reimpose midsize banks with the Dodd-Frank requirements from which they were exempted in 2018. That law, passed in 2010, was a response to the financial crisis of 2008. His relaxation had the support of one of the congressmen who gave him his name, Barney Frank, who was now a director of the intervened Signature Bank.

Massachusetts Democratic Senator Elizabeth Warren has been one of the most active: “In 2018, I sounded the alarm about what would happen if Congress rolled back critical Dodd-Frank protections: Banks would take on risk to increase their profits and they would collapse, threatening our entire economy, and that is precisely what has happened,” he said Tuesday in a statement. “President Biden has asked Congress to strengthen the rules for banks, and I am proposing legislation to do just that, repealing the core of Trump’s banking law,” she added.

Senator Bernie Sanders joins that call: “Five years ago, I helped lead the effort against the bank deregulation bill that has led to the downfall of Silicon Valley Bank and Signature Bank. Now is the time to repeal that law, take down the too-big-to-fail banks, and serve the needs of working families, not vulture capitalists. We cannot continue to have more and more socialism for the rich and rugged individualism for everyone else,” he has said.

Yellen declared on CBS’s Face the Nation last Sunday that a full-blown bailout with public money was not on the table. “We’re not going to do that again,” he said, referring to the response to the 2008 financial crisis, which included multibillion-dollar bailouts of big US banks to stabilize the economy.

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