The American banking system is healthy, but not all deposits are guaranteed, Yellen tells the senators

WASHINGTON, March 16 (Reuters) – The U.S. banking system remains healthy and Americans can feel confident that their deposits will be there when needed, Treasury Secretary Janet Yellen said on Thursday, although she denied that recent emergency actions following two major bank failures mean that There was now a general government guarantee for all deposits.

In her first public comments since this weekend’s emergency action with other regulators to ensure no depositors at Silicon Valley Bank ( SIVB.O ) and Signature Bank ( SBNY.O ) suffered losses, Yellen was pressed on whether that meant all uninsured deposits were now guaranteed .

“A bank only gets that treatment,” she told Republican Sen. James Lankford, whose supermajorities on the boards of the Federal Reserve, the Federal Deposit Insurance Corp and “I, in consultation with the president, determine that failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences.”

Her comments were the first explicit indication of regulators’ views on the limits of the weekend’s extraordinary guarantee that ensured tens of billions in uninsured deposits in Silicon Valley and Signature were not lost.

Ahead of that exchange, Yellen had touted the “decisive and forceful” emergency measures taken on Sunday, saying they had helped restore depositor confidence and prevented a wider run on banks.

“I can assure the members of the committee that our banking system is sound and that Americans can feel confident that their deposits will be there when they need them,” Yellen said in comments.

“This week’s actions demonstrate our resolute commitment to ensuring depositors’ savings remain safe.”

But it was clear that the $250,000 per depositor limit on FDIC insurance remained in place, and that any future failure would have to pose risks similar to those seen in Silicon Valley and Signature.

In their cases, she said, the chances of contagion that other banks could be seen as unsound and suffering from runs seemed extremely high, and the consequences would be very serious.

More than $9.2 trillion of U.S. bank deposits were uninsured at the end of last year, accounting for more than 40% of all deposits, according to Federal Reserve data. These uninsured deposits are not distributed evenly across the country, FDIC data show.

‘WERE NOT AT THE TOP’

The hearing, which had previously been scheduled to discuss the Biden administration’s budget proposal, offered the first public account of a member of the group of bank regulators that organized the bailout after Silicon Valley’s failure last Friday. The signature was seized by regulators over the weekend.

The emergency measures extended beyond depositor backstops, including improvements to banking sector liquidity anchored by the Fed. The moves have been met with both relief and consternation on Capitol Hill, where Democrats control the Senate and Republicans hold the House of Representatives.

Several lawmakers lamented that regulators failed to address the vulnerabilities before the banks suddenly collapsed.

“This administration bears a great deal of responsibility for the bank failures we had,” Republican Sen. Charles Grassley told reporters outside the hearing, adding that regulators were “not on top of it” in California.

Yellen said Silicon Valley’s collapse was essentially an inability to meet depositors’ demands for their money after interest rate hikes by the Federal Reserve over the past year undercut the value of the bond investments relied on to fund customer withdrawals. She also noted the high level of uninsured deposits in Silicon Valley as an aggravating factor.

“There was a liquidity risk in this situation,” Yellen told the committee. “There will be a thorough look at what happened in the bank and what initiated this problem, but it is clear that the downfall of the bank, the reason it had to close, was that it could not meet depositors’ withdrawal requests.”

She made no reference in her prepared remarks to the situation surrounding Credit Suisse, which saw its shares plunge on Wednesday before regulators promised a liquidity lifeline to the Swiss flagship.

“We are very focused right now on stabilizing the banking system and strengthening confidence, and I think there will be plenty of time that will be appropriate to look at what happened, and assess whether or not regulatory or supervisory changes are necessary,” she said.

“But for now, I would like to see confidence restored in the soundness of American banks.”

Reporting by Andrea Shalal; Editing by Kenneth Maxwell, Nick Zieminski and Marguerita Choy

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