Treasury Secretary Janet Yellen expressed confidence in the nation's banks Tuesday but said she is prepared to take additional action to safeguard smaller financial institutions as the Biden administration and federal regulators work to contain fallout from fears over the stability of the U.S. banking system.
Yellen, seeking to calm nerves as the financial system faces its worst turmoil in more than a decade, said the steps the administration and federal regulators have taken so far have helped restore confidence but that policymakers remain focused on ensuring the broader banking system remains secure.
"Our intervention was necessary to protect the broader U.S. banking system," Yellen said while speaking Tuesday at the Washington, D.C., meeting of the American Bankers Association, the industry's leading lobbying group. "And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion."
But "the situation is stabilizing. And the U.S. banking system remains sound," she said, drawing clear differences between recent events and the 2008 financial meltdown, which triggered trillions of dollars of financial losses globally. "2008 was a solvency crisis; Rather, what we're seeing now is contagious bank runs."
The comments came as government officials contemplate additional options to stem the flows of deposits out of small and midsize banks, and as concerns grow that more will need to be done.
Yellen said recent federal actions after the failure of Silicon Valley Bank and New York-based Signature Bank were intended to show that the Biden administration was dedicated to protecting the integrity of the system and ensuring deposits were secure.
In the past 10 days, federal regulators have used an emergency measure to guarantee the deposits of Silicon Valley Bank and Signature Bank, initiated a new Federal Reserve program to make sure other banks can secure funds to meet the needs of their depositors and coordinated with 11 big banks that deposited $30 billion into First Republic Bank, a wobbly regional bank based in San Francisco.
"The situation demanded a swift response," Yellen said. "In the days that followed, the federal government delivered just that: decisive and forceful actions to strengthen public confidence in the U.S. banking system and protect the American economy."
Despite those efforts, the Fed's campaign to raise interest rates over the past year to tame decades-high inflation has exposed weaknesses in the balance sheets of regional banks, rattling investors and raising fears that deposits are unsafe.
The recent volatility has led to calls for a review of the nation's financial regulations and raised doubts about whether the existing methods of supervising banks are sufficient.
The uncertainty about regional banks has also led to concerns that the industry will further consolidate among big banks. Yellen made clear Tuesday that banks of all sizes are important, highlighting how smaller banks have close ties to communities and bring competition to the system.
"Large banks play an important role in our economy, but so do small and midsize banks," Yellen said. "These banks are heavily engaged in traditional banking services that provide vital credit and financial support to families and small businesses."
Yellen added that the fortunes of the nation's banking system and its economy are inextricably tied.
While details are still being released on the banks' failures, Democratic lawmakers and some economists say a 2018 rollback of portions of a far-reaching 2010 law, the Dodd-Frank Act, intended to prevent a future financial crisis were a primary cause of the institutional failures.
Ahead of Yellen's speech, at a panel Tuesday morning discussing the state of the banking system, Zions Bank President Scott Anderson said he doesn't think the 2018 rollback is related to the bank failures.
"Congress needs to be careful," Anderson said. "They need to look at what happened. They need to have a thorough debate and a thorough discussion. But they shouldn't jump to any immediate conclusions. I don't think these failures show that there's any problem within the banking regulations that we have now."
Yellen's assurances came as U.S. officials study ways to temporarily expand Federal Deposit Insurance Corp. coverage to all deposits, a move sought by a coalition of banks arguing that it's needed to head off a potential financial crisis.
Treasury Department staff are reviewing whether federal regulators have enough emergency authority to temporarily insure deposits greater than the current $250,000 cap on most accounts without formal consent from a deeply divided Congress, according to people with knowledge of the talks.
Authorities don't yet view such a move as necessary, especially after regulators took steps this month to help banks keep up with any demands for withdrawals, the people said, asking not to be named describing confidential talks. Still, they are developing a strategy out of due diligence in case the situation worsens.
"We will use the tools we have to support community banks," White House spokesman Michael Kikukawa said, without directly addressing whether the measure is being studied. "Since our administration and the regulators took decisive action last weekend, we have seen deposits stabilize at regional banks throughout the country and, in some cases, outflows have modestly reversed."
Still, the behind-the-scenes deliberations show concerns exist in Washington's corridors of power as midsize banks call for broader government intervention after the recent U.S. bank failures, and as First Republic Bank strives to avoid a similar fate.
One legal framework under discussion for expanding FDIC insurance is expected to use the Treasury Department's authority to take emergency action and lean on the Exchange Stabilization Fund, the people said.
That fund typically is used to buy or sell currencies and to provide financing to foreign governments. But the fund, created in the 1930s, has been used as a backstop for emergency lending facilities by the Fed in recent years. It's the only pot of money under the full authority of the Treasury secretary, with other spending and financing under the jurisdiction of Congress.
"Due to decisive recent actions, the situation has stabilized, deposit flows are improving and Americans can have confidence in the safety of their deposits," a Treasury spokeswoman said in a statement. Representatives for the FDIC and Fed declined to comment.
Information for this article was contributed by Alan Rappeport of The New York Times; Saleha Mohsin, Sridhar Natarajan and staff of Bloomberg News (TNS); and Fatima Hussein of The Associated Press.