US Treasury secretary Janet Yellen ruled out a broad expansion of deposit insurance to protect savers with balances above $250,000 in the near term, comments that fuelled another sell-off in shares of smaller US banks.
Speaking at a Senate hearing on Wednesday afternoon, Yellen said there could be “reasoned discussions” on whether the current $250,000 limit for insured deposits should be lifted as part of long-term systemic reforms.
But the Treasury secretary said that in the current turmoil, the Biden administration was not considering a move to broaden deposit insurance, something that would require congressional approval unless the Treasury found a way to implement it unilaterally.
“I have not considered or discussed anything to do with blanket insurance or guarantees of deposits,” Yellen said.
Her comments came shortly after Jay Powell, the chair of the Federal Reserve, sought to reassure Americans that their deposits were “safe” because of actions already taken by policymakers, including a facility set up by the central bank to boost liquidity for smaller banks.
Yellen said uninsured deposits above $250,000 could be protected only if a failed bank was deemed to pose a systemic risk to the financial system, as occurred earlier this month with Silicon Valley Bank and Signature Bank. She said that determination would occur only on a case-by-case basis.
Earlier this week, in a speech at the American Bankers Association, Yellen had said the US government was ready to step in for individual banks if necessary. “Similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” she said at the time.
Yellen’s comments came on another brutal day for investors in smaller US banks. Shares of such lenders were already falling on Wednesday, but the declines accelerated after the Treasury secretary’s testimony in the afternoon.
The KBW Bank index, which tracks shares in 24 large and midsized banks, dropped almost 5 per cent, reversing all the gains it made after Yellen’s comments at the bankers’ association on Tuesday.
The decline weighed on the broader S&P 500, with banks making up seven of the 10 worst performers on the benchmark index. First Republic led the declines, dropping 15 per cent. Comerica, M&T Bank and US Bancorp each fell more than 7 per cent.
Shares of PacWest, a Beverly Hills-based bank, fell 17 per cent, after it said it had lost 20 per cent of its deposits this year and announced it had bolstered its access to cash by tapping a $1.4bn lending facility from an investment firm.
Meanwhile, First Republic said executives would not be paid their bonuses for 2023 — while the founder and executive chair will stop receiving a salary — as the lender tries to win back investor confidence after its shares fell more than 85 per cent in a month.
Fitch, the rating agency, cut the San Francisco-based bank further into junk territory, warning: “[First Republic] is currently operating at a net loss that is not sustainable over the longer term absent a balance sheet restructuring.”
On Wednesday evening, Citigroup chief executive Jane Fraser said in an interview at the Economic Club of Washington DC that the US financial system remained healthy, outside of a few “idiosyncratic” events. Fraser said regulators had acted quickly given the speed at which Silicon Valley Bank deteriorated and thought the plan by big banks to deposit $30bn into First Republic had been effective. When asked if Citi was interested in buying First Republic, Fraser, though, said no.
“There are pockets of problems,” said Fraser. “This is not a credit problem, and it is good the big banks got together to nip that in the bud.”
Democratic and Republican lawmakers, as well as some banking lobbyists, executives and economists, have called for the US to increase or suspend the $250,000 limit for insured deposits in order to prevent further deposit flight from small and regional banks.
However, there is no clear bipartisan consensus in Congress for such a move. Many Republicans are wary of lifting the limit on the grounds that it would expand the federal government’s role in the banking system and might result in higher fees for banks — which fund deposit guarantees — that might be passed on to consumers.
Meanwhile, some Democrats have concerns relating to moral hazard, and are worried that it could reward risky behaviour by banks.
Despite Yellen’s comments, the debate over expanding bank deposit guarantees in the US is expected to continue, particularly if there is further deposit flight as a result of the current turmoil.
Additional reporting by Stephen Gandel in New York
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