US is ready to protect all deposits to avoid a new crisis

House Republicans refuse to guarantee deposits exceeding $250K
US is ready to protect all deposits to avoid a new crisis
US intervention on savings withdrawals

In a major shift that seeks to protect parts of the US banking system, one that is struggling in light of the recent financial turmoil, US Treasury Secretary Janet Yellen announced that measures will be taken to protect deposits in other banks should excessive savings withdrawals increase.

Bloomberg had previously reported that US officials were studying ways in which they could temporarily expand the coverage of the Federal Deposit Insurance Corporation to include all deposits, a step sought by a coalition of banks on the grounds that it is necessary to avoid a possible financial crisis.

After signs emerged that panicked depositors withdrew their savings from regional banks in recent days, Yellen said in a speech to the American Bankers Association that the guarantees provided to all depositors of “Silicon Valley Bank”, which declared bankruptcy, could be replicated in other institutions, if necessary.

“The steps we took were not focused on helping specific banks or classes of banks,” Yellen said. “Our intervention was necessary to protect the broader US banking system. Similar actions could be warranted if small institutions are experiencing deposit outflows that pose a contagion risk.”

Read: Flagstar bank to acquire Signature’s deposits in $2.5 bn deal

The Treasury Department has worked with the Federal Reserve and the Federal Deposit Insurance Corporation to provide guarantees for all deposits, including uninsured ones, at Silicon Valley banks and Signature, both of which closed this month. In addition, the Fed announced new facilities to boost liquidity for troubled banks.

Yellen defended the “decisive” and “robust” steps taken by regulators to avert a broader banking crisis in the United States, even though the problems plaguing smaller institutions have yet to be resolved.

She noted that the United States is relatively comfortable with market developments in recent days. “The situation is stabilizing. The banking system in the United States will remain intact,” she said.

The Fed facility and discount window lending are working as intended to provide liquidity to the banking system. The total deposit outflows from regional banks have stabilized.

She added, “We are focused squarely on doing our job…and you should rest assured that we will remain vigilant.”

Yellen also emphasized the importance of small and medium-sized banks to the US economy. The great concern in recent days has been that the current crisis will strengthen the larger financial institutions at the expense of the smaller ones.

She said: “Large banks play an important role in our economy, but so do small and medium-sized banks. These banks are heavily involved in traditional banking providing vital credit and financial support to families and small businesses. They also increase competition in the banking sector and often have specialized knowledge and experience in the communities in which they invest.

Yellen’s comments come after Republican hawks in the US House of Representatives pledged to oppose any blanket federal guarantee for bank deposits in excess of the current limit of $250,000, putting a major hurdle to a key tool regulators could turn to in the event of a resurgence of a run on bank withdrawals.

The Freedom Caucus of House Republicans said in a statement that the Federal Reserve “must dismantle” the extraordinary financing mechanism it created on March 12 that allows banks to increase borrowing from it to cover deposit outflows.

A blanket guarantee on all bank deposits… “sets a dangerous precedent that simply encourages irresponsible behavior in the future to be paid for by those who stick to the rules,” the group added.

For more on banking and finance, click here.

The stories on our website are intended for informational purposes only. Those with finance, investment, tax or legal content are not to be taken as financial advice or recommendation. Refer to our full disclaimer policy here.