Treasury Secretary Janet Yellen attempted to assure banking institutions on Tuesday that the U.S. is prepared to step in and help smaller banks facing bank runs that pose the risk of contagion. It was a more direct sign of support than she gave in testimony to senators last week.
One week ago, federal regulators took extraordinary steps to protect the uninsured customers of failed Silicon Valley Bank and Signature Bank. While the FDIC insures deposits up to $250,000, more than 90% of accounts at both banks were over that limit.
“Rest assured, they’ll be protected, and they’ll have access to their money as of today,” President Joe Biden said on March 13.
Unlike the bank bailouts of 2008, regulators did not use taxpayer money to make depositors whole. Instead, they drew from the government’s bank Deposit Insurance Fund, which FDIC-insured banks across the country pay into. The government said any losses to the fund would be backfilled by a special fee on banks.
“We felt that there was a serious risk of contagion that could have brought down and triggered runs on many banks,” Treasury Secretary Janet Yellen told senators on March 16.
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A bank run happens when a large amount of customers attempts to withdraw money at the same time over fears surrounding the bank’s solvency. Because banks typically only hold a small percentage of assets in cash, withdrawal requests that exceed what they have on hand can cause insolvency, like with SVB. In one day, SVB customers attempted to withdraw 20% of the bank’s total deposits.
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When a bank run happens, there is little a bank can do if it can’t unload assets in time. Customer fears can be exacerbated when their deposits are uninsured.
“Everybody’s insured up to $250,000, but these are small startups and other firms that have multimillion dollars – or cryptocurrency firms that are having a stablecoin, in the case of Signature [Bank] – where there’s bunches of millions of dollars, and they want to take them out. Because it will be uninsured, it will be frozen in this bank, short of what the regulators did over the weekend,” Public Citizen financial policy advocate Bartlett Naylor said. “Much as regulators and our president is trying to reassure us, this system runs on faith.”
And that faith is shaken. For more than a week, Americans have been pulling their money out of smaller regional banks and putting it into banks considered “too big to fail,” which has helped exacerbate the crisis of confidence in regional banks, from First Republic to PacWest.
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While the federal government made the decision to fully secure the uninsured deposits at Silicon Valley Bank and Signature Bank, Yellen initially said banks will only get that treatment if the federal government believes letting it fail would create systemic risk and significant economic consequences. This has led some to accuse Yellen of picking favorites.
“What is your plan to keep large depositors for moving their funds out of community banks into the big banks?” Sen. James Lankford, R-Okla., asked Yellen. “We have seen the mergers of banks over the past decade. I’m concerned you are about to accelerate that by encouraging anyone who has a large deposit in a community bank to say, ‘We are not going to make you whole but if you go to one of our preferred banks, we will make you whole.’”
“That’s certainly not something that we’re encouraging,” Yellen answered. “That is happening right now because depositors are concerned about the bank failures that have happened and whether or not other banks could also.”
On Tuesday, Yellen clarified U.S. support in prepared remarks to the American Bankers Association, noting that actions similar to those taken at Silicon Valley Bank and Signature Bank could be taken at smaller institutions that suffer bank runs.
“The situation is stabilizing,” she added. “And the U.S. banking system remains sound.”
