It has been anything but a “sound” few days for the banking system in the U.S. Over the course of one week, La Jolla, California-based Silvergate announced that it was ceasing operations while Silicon Valley Bank (SIVB) was closed by regulators following a classic bank run a few days later.
New York regulators then also closed New York’s Signature Bank following a similar rush of customer withdrawals.
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Panic is the enemy of any banking system and many are currently fearing a larger banking crisis. Shares of First Republic Bank (FRC) remain volatile, having fallen more than 70% since March 8 before rebounding on takeover talk. Embattled Credit Suisse (CSGKF) shares have fallen nearly 30% in the last month.
Why Yellen Still Thinks The Banking System Is ‘Sound’
As all this happens, Secretary of the Treasury Janet Yellen says that the U.S. banking system is “sound” while the federal government is taking “decisive and forceful actions to strengthen public confidence in our banking system.”
“I can reassure the members of the committee that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them,” Yellen told members of the Senate Finance Committee. “This week’s actions demonstrate our resolute commitment to ensure that depositors’ savings remain safe.”
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The emergency panel is meant to reassure investors and customers that the closures will not provoke a wider banking collapse.
Yellen said that the Treasury Department and the Federal Reserve were taking steps to protect consumers who at all points were able to “access all of the money in their deposit accounts” but also said that comparisons to government bailouts of past financial crises were inaccurate given that the banks themselves have the insurance for such a situation.
The Government Isn't on the Hook, Yellen Insists
“Shareholders and debtholders are not being protected by the government,” Yellen said during the address. “Importantly, no taxpayer money is being used or put at risk with this action. Deposit protection is provided by the Deposit Insurance Fund, which is funded by fees on banks.”
The remarks were prepared ahead of time and focused on the banks that collapsed rather than the share plummet of First Republic and Credit Suisse.
As a result, some senators grilled Yellen on whether the collapse can trigger wider uncertainty. Senator Mike Crapo (R-ID) said he was “concerned about the precedent of guaranteeing all deposits and the market expectations moving forward.”
Yellen, in turn, insisted that the collapse was due to “gross mismanagement” on the part of the banks themselves rather than a systemic government problem. In letters sent to the heads of Signature and SVB, Yellen accused the banks of “managerial incompetence” over their support of a 2018 law that brought down capital requirements for small and midsize banks.
“There will be a careful look at what happened in the bank and what initiated this problem, but clearly the downfall of the bank, the reason it had to be closed, was that it could not meet depositors' withdrawal requests,” Yellen said in response to Crapo.
