U.S. Is Ready to Protect Smaller Banks if Necessary, Yellen Says

WASHINGTON — Treasury Secretary Janet L. Yellen expressed confidence in the nation’s banks on Tuesday but said she was prepared to take additional action to safeguard smaller financial institutions as the Biden administration and federal regulators worked to contain fallout from fears over the stability of the banking system.

Ms. Yellen, seeking to calm nerves as the U.S. financial system faces its worst turmoil in more than a decade, said the steps the administration and federal regulators had taken so far had helped restore confidence. But policymakers were focused on making sure that the broader banking system remained secure, she said.

“Our intervention was necessary to protect the broader U.S. banking system,” Ms. Yellen said in remarks before 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.”

She added: “The situation is stabilizing. And the U.S. banking system remains sound.”

However, Ms. Yellen also underscored the gravity of the current situation. She said the stresses to the banking system, while not as dire as the 2008 financial meltdown, still constituted a “crisis” and pointed to the risk of bank runs spreading.

“This is different than 2008; 2008 was a solvency crisis,” Ms. Yellen said. “Rather what we’re seeing are contagious bank runs.”

In response to a question from Rob Nichols, the chief executive of the American Bankers Association, Ms. Yellen said she did not want to “speculate” about what regulatory changes might be necessary to prevent a similar situation from recurring.

“There’s time to evaluate whether some adjustments are necessary in supervision and regulation to address the root causes of the crisis,” she said. “What I’m focused on is stabilizing our system and restoring the confidence of depositors.”

She spoke as government officials contemplated additional options to stem the flow of deposits out of small and medium-size banks, and as concerns grew that more would need to be done.

Ms. Yellen said recent federal actions after the failure of Silicon Valley Bank and Signature Bank this month were intended to show that the Biden administration was dedicated to protecting the integrity of the system and ensuring that 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, a wobbly regional bank.

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“The situation demanded a swift response,” Ms. 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 to tame inflation has exposed weaknesses in the balance sheets of regional banks, rattling investors and raising fears that deposits are not safe.

Ms. Yellen said the financial system was far stronger than it was 15 years ago but also called for an examination of how the recent bank failures occurred.

“In the coming weeks, it will be vital for us to get a full accounting of exactly what happened in these bank failures,” she said. “We will need to re-examine our current regulatory and supervisory regimes and consider whether they are appropriate for the risks that banks face today.”

The Federal Reserve, which is the primary regulator for banks, is undertaking a review of what happened with Silicon Valley Bank as well as looking more broadly at supervision and regulation.

The uncertainty about regional banks has also led to concerns that the industry will further consolidate among big banks.

Ms. Yellen made clear on 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 midsized banks,” she said. “These banks are heavily engaged in traditional banking services that provide vital credit and financial support to families and small businesses.”

The Treasury secretary added that the fortunes of the U.S. banking system and its economy were inextricably tied.

“You should rest assured that we will remain vigilant,” she said.

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