Yellen, caught between markets and US Congress, tweaks message
Janet Yellen is the face of the US government on this issue and her public comments have sent markets on a roller coaster ride.
For the fourth time in a week, US Treasury Secretary Janet Yellen has used a microphone to reassure Americans that the US banking system is safe, each time with a subtle shift in the message.
But bankers and Wall Street never heard what they desperately wanted: for the government to guarantee all $19.2 trillion in U.S. bank deposits until the banking crisis that erupted two weeks ago has calmed down.
Yellen is the face of the US government on this issue and her public comments have sent markets on a rollercoaster ride.
Each time she spoke, Yellen has said more explicitly that the US will indemnify the deposits, but has no blanket guarantee, which would insure account balances of any size, including those above the current $250,000 limit.
Her remarks on Thursday indicated more clearly than before that further guarantees for uninsured deposits would come in the form of bailouts for depositors from individual failing banks where problems threaten to lead to runs on other banks.
She told U.S. lawmakers that banking regulators and the Treasury were willing to provide extended deposit guarantees with other banks, as they did with the failed Silicon Valley Bank (SVB) and Signature Bank.
“These are tools that we could reuse for an institution of any size if we judge that their failure would pose a contagion risk,” she told a hearing before the U.S. House of Representatives’ subcommittee on appropriations.
The comments helped lift broad stock indices, but regional bank stocks, including those of the struggling First Republic Bank, continued to fall.
Yellen had told a Senate subcommittee on Wednesday that she was not considering bypassing Congress and granting “general insurance” for all U.S. bank deposits.
The influence of Congress
This is a step taken unilaterally by the government and regulators during the 2008 global financial crisis, but US President Joe Biden’s administration should now receive congressional approval under the 2010 reforms.
Hardline Republicans oppose any increase to the Federal Deposit Insurance Corp’s current limit of $250,000, making it unlikely that Yellen could hastily arrange such a backstop even as the crisis deepens.
Banks and markets have sometimes found Yellen’s comments disturbing. On March 16, she told a Senate hearing that banks had to pose a systemic risk in order to get a deposit guarantee.
But at a banking conference on Tuesday, she said actions similar to the SVB guarantee “may be justified when smaller institutions face deposits,” reassuring those institutions.
Yellen’s reluctance to endorse a universal backstop has drawn criticism from investors, including hedge fund manager Bill Ackman. They argue that a universal guarantee is needed to prevent depositors at small and medium-sized banks from fleeing for safety at large banks that are considered “too big to fail”.