THE BASIS POINT

Treasury Chief Yellen on calming bank crisis & importance of local banks

Treasury Secretary Janet Yellen gave a key speech March 21 on regulatory steps to prevent bank crisis from spreading. Here are the key excerpts.

In response to the bank crisis triggered by Silvergate, Silicon Valley Bank, and Signature Bank failing, the government took:

…decisive and forceful actions to strengthen public confidence in the U.S. banking system and protect the American economy.

Let me be clear: the government’s recent actions have demonstrated our resolute commitment to take the necessary steps to ensure that depositors’ savings and the banking system remain safe.

Yellen noted their approach has 2 main pillars:

First, we worked with the Federal Reserve and FDIC to protect all depositors in the resolutions of Silicon Valley Bank and Signature Bank. The steps we took were not focused on aiding specific banks or classes of banks. Our intervention was necessary to protect the broader U.S. banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion. I believe that our actions reduced the risk of further bank failures that would have imposed losses on the Deposit Insurance Fund, which is paid for through fees on insured banks.

Second, we announced a new facility to provide additional liquidity to the banking system. The Fed’s new lending facility – the Bank Term Funding Program – is designed to help banks meet the needs of all of their depositors.

On the First Republic Bank situation, which is a key bank in the regional banking sector, and stabilizing this bank will ostensibly stabilize the broader regional banking sector:

As you know, 11 banks – including the very largest and some regional banks – announced $30 billion in deposits into First Republic Bank last week. This support represents a vote of confidence in our banking system.

We are continuing to monitor conditions closely. My team and I have been in close communication with many of you, in addition to federal and state regulators, other market participants, and international counterparts.

While we don’t yet have all the details about the collapse of the two banks, we do know that the recent developments are very different than those of the Global Financial Crisis. Back then, many financial institutions came under stress due to their holdings of subprime assets. We do not see that situation in the banking system today. Our financial system is also significantly stronger than it was 15 years ago. This is in large part due to post-crisis reforms that provided stronger capital standards, among other important improvements.

In the coming weeks, it will be vital for us to get a full accounting of exactly what happened in these bank failures. Regulators have already announced a review into Silicon Valley Bank. We are currently focused on the situation at hand.

Yellen emphasizes the importance of ALL banks, not just big banks:

Given recent developments, I think it is important to reaffirm a broader point: our dynamic and diverse banking system is critical to the American economy. Large banks play an important role in our economy, but so do small- and mid-sized banks. These banks are heavily engaged in traditional banking services that provide vital credit and financial support to families and small businesses. They also increase competition in the banking sector, and often have specialized knowledge and expertise in the communities they invest in.

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Reference:

Remarks by Secretary of the Treasury Janet L. Yellen at the American Bankers Association’s Washington DC Summit

 

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