US economic leaders appeared to be speaking with one voice on Wednesday as Federal Reserve Chair Jay Powell and Treasury Secretary Janet Yellen separately assured savers their money was safe.
But a few minutes later there was a sell-off in bank stocks, reflecting investor confusion at how far the government was willing to go to protect those depositors.
Yellen had been asked by Bill Hagerty, a Republican senator from Tennessee, whether the Biden administration was considering a unilateral guarantee on all bank deposits — including those above the current $250,000 limit for federally insured savings. She replied that the US authorities would not go so far.
“I didn’t consider or discuss anything that had to do with blanket insurance or guarantees,” she said.
The market sell-off following Yellen’s comments underscores ongoing concerns about the fate of uninsured deposits at small and regional banks two weeks after the collapses of Silicon Valley Bank and Signature Bank. Investors and depositors are awaiting every word from policymakers for clues as to the government’s willingness to intervene.
“What Yellen and Powell are trying to do, which is difficult, is calibrating what they’re saying so they haven’t committed to doing a lot of things that were unnecessary when this is over, while also acknowledging that, if it gets worse, obviously we need to do more,” said David Wessel, senior fellow in economics studies at the Brookings Institution.
The US Treasury and Fed implicitly assumed that the authorities would step in to protect Americans’ savings and prevent a broader banking crisis when they set up a liquidity facility to prop up troubled banks on generous terms and uninsured depositors to save at the SVB and signature.
But regulators have balked at explicitly guaranteeing all deposits in the country, or even raising the limit on insured deposits. These more radical moves would likely require the politically delicate process of Congressional approval.
“The way we think about deposit insurance post-Dodd-Frank certainly requires action from Congress [Federal Deposit Insurance Corporation] to provide a blanket, universal guarantee for all deposits,” said Sarah Binder, a professor at George Washington University, citing the regulations that were passed after the 2008 financial crisis. For now, the Biden administration is still intent on tackling problems at individual banks on a case-by-case basis.
On Tuesday, Yellen said at a meeting of the American Bankers Association that “similar actions” to those taken by SVB and Signature “may be warranted if smaller institutions suffer from deposit runs that risk contagion,” contributing to a rally in bank stocks. Then came her statements in the Senate on Wednesday and the market sell-off.
By Thursday, this time before the House of Representatives, Yellen tweaked her testimony to provide a response comparable to her remarks two days earlier, again reassuring investors.
“We have deployed important tools to act quickly to prevent contagion. And they’re tools that we could use again,” she said, adding, “Obviously we’d be willing to take additional action if necessary.”
Although critics have suggested that Yellen’s comments contradict or conflict with Powell’s, most economic policy experts in Washington have dismissed any suggestion of a rift between them in their response to the crisis. Powell’s statements about the safety of deposits overall are based on confidence in the power of the Fed facility, while he has not directly addressed the more narrow issue of guarantees for uninsured accounts.
“I don’t think there’s a substantive difference between what Powell said and what Yellen said [but] I don’t think they have fully embraced politics 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 opinion, both have the same goal – to quell the panic and flight.”
However, some have blamed mixed messages from Washington for feeding the market turmoil.
“The longer the uncertainty lasts, the more permanent the damage will be for the smaller banks and the harder it will be to bring their customers back,” Bill Ackman, the activist investor and chief executive of Pershing Square Capital, said on Twitter.
National Alliance Securities’ Andrew Brenner accused Yellen of “rambling” on the deposit issue.
Wessel added, “I would say it wasn’t the most sophisticated communication from the Treasury Department.”
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On Friday afternoon, after a meeting of the Financial Stability Oversight Council, US regulators and officials including Yellen and Powell said the banking system had remained “healthy and resilient” – amid some consolation that deposit flows had stabilized and the crisis was contained be a few institutions.
A person familiar with the mindset of the Biden administration said Friday she doesn’t see an expansion of deposit insurance as “necessary” because she already has “tools” to support community banks.
The White House said: “Since our government and regulators took decisive action last weekend, we have seen deposits in regional banks across the country stabilizing and, in some cases, outflows reversing slightly.”
But if tensions in the banking sector continue or worsen, the fog of whose uninsured deposits might be protected could become increasingly problematic.
“I think the bigger problem is the one that policymakers always have in times like these: how do you try to restore confidence in the banking system without exaggerating how much you know or saying something you can say for three days will regret later? when something explodes? I think everyone is struggling with that,” said Wessel.