Janet Yellen promises US banking is ‘sound’ during grilling in the Senate

Treasury Secretary Janet Yellen stressed that the US banking system is “safe” and “sound” in her first public testimony before the Senate Finance Committee since the fall of Silicon Valley Bank.

In words intended to calm nervous savers and investors, the secretary stressed that the government’s emergency measures were successful in stabilizing the banking sector.

“On Monday morning, customers had access to all the money in their deposit accounts so they could make payroll and pay the bills,” Yellen said.

“This week’s actions demonstrate our determination and commitment to ensuring our financial system remains strong and savers’ savings remain safe.”

On Sunday night, the Treasury, Federal Reserve and FDIC announced they would protect all SVB deposits, even those above the $250,000 limit, drawing criticism from Republicans and some Democrats who saw it as a bailout.

But Yellen insisted that “no taxpayer money will be used or endangered” as the money will be disbursed through the FDIC insurance fund.

But most taxpayers are bank depositors, and a portion of their deposits go to the FDIC Insurance Fund, and that money is used to pay off depositors at both Silicon Valley Bank and Signature Bank.

The Treasury’s pre-emptive pledge of $25 billion in taxpayers’ money to help other institutions cover a rush of withdrawals has also raised eyebrows. This newly announced Bank Term Funding Program offers one-year loans to banks that provide high-quality securities as collateral.

Yellen insisted that ‘no taxpayer money is used or endangered’ as the money will be disbursed through the FDIC insurance fund

The catch for the taxpayer is that the Treasury values ​​the securities used as collateral “at par” — that is, what they were bought for, rather than what they are worth today, which is less in most cases. That means if banks tap into the fund but can’t pay the debt, the Treasury (and taxpayers) could end up with a huge deficit.

While some on the left are pushing for new banking regulations and the bringing back of Dodd-Frank restrictions that were reversed in 2018, moderates and some Republicans are blaming regulators.

Senator John Cornyn, R-Texas, noted at the hearing that arguments that banking regulators are more concerned with managing climate risk than oversight “have a point.”

“Where were the supervisors?” asked Senator Mark Warner, D-Va.

Senator Mike Crapo, a senior member of the commission, said he was “concerned about the precedent of guaranteeing all deposits and the market’s expectations going forward.”

He called the move a “moral hazard” that, like inflation, is “not easy to control.”

Crapo also said inflation played a major role in the current situation as banks have mismanaged rising interest rate risk.

Yellen did not deny his claim. “It is my understanding that in order to meet liquidity needs, the bank had to sell assets that it had expected to hold to maturity given the rise in interest rates…they had lost market value.”

Yellen, who was there to talk about President Biden’s new budget proposal but was brushed aside with questions about the recent banking collapse, also said she doesn’t believe Biden’s spending was a major contributor to inflation .

Do you agree that these are the three main causes of inflation? Shortage of expenditure, high energy costs and supply disruption?’ Senator Ron Johnson, R-Wisc., asked her.

“I don’t believe budget deficits are one of the main drivers of inflation,” Yellen replied.

Sen. Bill Cassidy, R-La., used his questions to point out that Biden did not propose ideas to address Social Security solvency in his new budget proposal. The senator noted that Biden had proposed $4.5 trillion in new taxes in the budget, none of which went to the widely popular senior citizen program.

“Why doesn’t the president care?” said Cassidy. “He cares about him very much,” Yellen said.

“Where’s his plan then?”

“He’s ready to work with Congress,” Yellen said.

Cassidy shot back, “That’s a lie. A bipartisan group of senators has repeatedly requested a meeting with him.”