Treasury Secretary Janet Yellen insisted Thursday that the US banking system is “safe” and “healthy” in her first public hearing since the fall of the Silicon Valley bank before the Senate Finance Committee.
In words intended to reassure nervous depositors and investors, the minister insisted the government’s emergency measures had successfully stabilized the banking sector.
“By Monday morning, customers could access all the money in their deposit accounts to do payroll and pay the bills,” Yellen said.
“This week’s actions demonstrate our determination and commitment to ensuring that our financial system remains strong and depositor savings remain safe.”
Treasury Secretary Janet Yellen insisted the US banking system is “safe” and “sound” in her first public hearing since the fall of Silicon Valley Bank before the Senate Treasury Committee
The Dow Jones Industrial Average started the day down over 600 points on continued pressure after the collapse of regional banks like Silicon Valley Bank and Signature Bank.
On Sunday night, the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation announced they would protect all SVB deposits, including those above the $250,000 limit, prompting criticism from Republicans and some Democrats who do not viewed as a rescue package. Regulators also took control and shut down New York-based Signature Bank.
But Yellen insisted that “no taxpayer money will be used or jeopardized” since the money will be paid out through the FDIC insurance fund.
But most taxpayers are bank depositors, and a portion of their deposits go into the FDIC insurance fund. This money is used to pay out depositors at SVB and Signature.
The Treasury Department’s precautionary pledge of $25 billion in taxpayer money to help other institutions meet a rush of withdrawals has also raised eyebrows. This newly announced Bank Term Funding Program offers one-year loans to banks that offer “quality securities” as collateral.
The catch for the taxpayer is that the Treasury rates the securities used as collateral “at face value” – ie what they were bought for, rather than their current value, which in most cases is less. That means if the banks tap the fund but can’t pay the debt, the Treasury (and the taxpayer) could run into a huge deficit.
While some on the left are pushing for new banking regulations and reinstating the Dodd-Frank restrictions reversed in 2018, moderates and some Republicans are blaming regulators.
Sen. John Cornyn, R-Texas, noted during the hearing that arguments that banking regulators are more concerned with managing climate risks than oversight “have a point.”
“Where were the regulators?” asked Sen. Mark Warner, D-Va.
Senator Mike Crapo, senior member of the committee, said he was “concerned about the precedent of guaranteeing all deposits and market expectations moving forward.”
He called the move to also guarantee uninsured deposits with SVB and Signature a “moral risk” that, like inflation, “is not easy to contain”.
Crapo also said that inflation plays an important role in the current situation as banks mismanage rising interest rate risk.
A security guard looks out a door as customers queue at Silicon Valley Bank’s headquarters in Santa Clara, California – the second largest bank failure in American history
The Federal Deposit Insurance Corporation (FDIC) took control of New York-based Signature Bank over the weekend, making it the third largest bank failure in US history.
People walk past the New York Stock Exchange (NYSE) in downtown Manhattan as investors continue to express concerns about the stability of global banks following the collapse of Silicon Valley Bank last week.
Yellen did not dispute his claim. “To my knowledge, the bank had to sell assets that, due to the rate hikes, it expected it would hold to maturity to meet liquidity needs…they had lost market value.”
Yellen, who was there to speak about President Biden’s new budget proposal but was sidelined with questions about the recent bank collapse, also said she doesn’t think Biden’s spending was a major contributor to inflation.
“Do you agree that these are the top three causes of inflation? Deficit spending, high energy costs and supply disruptions?’ Sen. Ron Johnson, R-Wisc., she asked.
“I don’t think deficit spending is a major cause of inflation,” Yellen replied.
Sen. Bill Cassidy, R-La., used his questioning to indicate that Biden did not propose any ideas to solve Social Security’s ability to pay in his new budget proposal. The senator noted that Biden had proposed $4.5 trillion in new taxes in the budget, none of which would go to the widely popular senior citizen program.
“Why doesn’t the President care?” said Cassidy. “He takes great care of it,” Yellen said.
‘Then where is his plan?’
“He’s willing to work with Congress,” Yellen said.
Cassidy shot back, “That’s a lie. A bipartisan group of senators has repeatedly asked to meet with him.’
Sen. Chuck Grassley, R-Iowa, told Yellen the president must stop “demagogy” when it comes to Social Security and Medicare when he realizes those programs will default within the decade if reforms are not implemented.
Biden has repeatedly used Social Security and Medicare as a political bludgeon, claiming Republicans want to cut the programs.
Yellen also tore into the House GOP’s debt prioritization plan, which would allow the Treasury Department to continue borrowing money to pay interest on the federal debt even if the $31.4 trillion debt ceiling is not met by a deadline in March will be raised in June. It would also ensure that Social Security and Medicare payments can continue.
“There’s a reason finance ministers from both parties have rejected this incredibly risky and dangerous idea, and it’s never been tried before,” Yellen said.
“I cannot give any assurances about the technical feasibility of such a plan. It would be an extraordinarily risky, untried and radical departure from normal payment practices.”
When Yellen failed to raise the debt ceiling, she said, “It’s unimaginable.”