Mar 22, 2023
Yellen to Stress No Protections for Bank Owners and Bondholders
(Bloomberg) -- Treasury Secretary Janet Yellen said regulators aren’t looking to provide “blanket” deposit insurance to stabilize the US banking system without working with lawmakers, and that the heads of recently failed American lender should be held accountable.
“I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits,” Yellen said Wednesday during a hearing before a Senate subcommittee, answering a question about whether the protections for all US deposits would require congressional approval. She didn’t clarify if that refers to a temporary or permanent change in the cap.
Yellen has earlier said that the US is prepared to take further actions to protect depositors if smaller lenders are threatened. Her staff is studying ways to temporarily raise the federal insurance cap above $250,000 without Congressional approval in the event the crisis grows, Bloomberg News reported Monday.
Yellen, along with Federal Reserve Chair Jerome Powell, has been at the center of US government efforts to restore stability to the US banking sector and calm financial markets after the collapse of some mid-sized lenders. Oversight by regulators, and their steps to contain the crisis, have faced intense scrutiny from lawmakers and investors.
Her testimony Wednesday comes shortly after the Fed’s rate-hike decision, with the central bank saying in a release that US banking system is “sound and resilient.” Powell also said in a press conference that the Fed is committed to learning lessons from the situation.
Read more: Banks Drive Stocks Lower After Yellen’s Remarks: Markets Wrap
Regional bank shares slumped, dragging down the broader market, after Yellen’s comments and as Powell said he’s prepared to keep raising rates until inflation shows signs of cooling. Stocks had initially rallied after the Fed hiked by a quarter percentage point.
A permanent change to the Federal Deposit Insurance Corp.’s $250,000 cap would require Congressional approval, but Treasury has access to a roughly $30 billion pot of money in the Exchange Stabilization Fund that some officials have said could be leveraged for a temporary measure.
“This is not something we have looked at,” Yellen said Wednesday, adding that it’s not the right time to determine if the limit should be raised.
The prospect of Treasury making such a unilateral move rankled Republican lawmakers. Senator Bill Hagerty of Tennessee told Yellen during the hearing that it would be a “misuse” of the stabilization fund.
Still, Yellen hinted at having given further thought around raising the FDIC cap on a temporary basis. She assured Senator Joe Manchin that in the event the insurance is extended, it could be seen as a “special one-time assessment” where the cost was not a burden to customers with smaller deposits.
Yellen also said in the hearing that executives responsible for the collapse of a bank shouldn’t be profiting when stockholders and investors take losses.
“This is an important form of accountability and we would be glad to work with you on that legislation,” Yellen said. “It’s important to be clear: Shareholders and debtholders of the failed banks are not being protected by the government,” she had said earlier in her opening remarks.
The Federal Deposit Insurance Corp. on March 12 announced it would guarantee all deposits at the failed Silicon Valley Bank and Signature Bank. On the same day, the Federal Reserve launched an emergency lending program, and relaxed terms at its standing facility for banks facing liquidity needs, in an effort to reassure depositors nationwide.
Speaking to a conference of bankers on Tuesday, Yellen said the government stood ready to repeat the actions it took to rescue uninsured deposits at the failed lenders “if smaller institutions suffer deposit runs that pose the risk of contagion.”
Wednesday’s hearing, before the Financial Services and General Government Subcommittee, was scheduled to give lawmakers a chance to question Yellen on President Joe Biden’s proposed 2024 budget. The committee earlier released the text of her prepared remarks.
On the budget, Yellen will address the administration’s controversial request for an additional $14 billion for the Internal Revenue Service, just a year after Congress appropriated $80 billion to rebuild the IRS over the next decade.
“Our budget request provides steady-state operational funding that will allow taxpayers to receive the best service possible,” Yellen said. “It will complement the one-time, long-term investment in the IRS.”
(Updates to add context on congressional approval in first two sentences.)
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