WASHINGTON (AP) – Treasury Secretary Janet Yellen offered firm, upbeat reassurances to rattled bank depositors and investors Thursday, even as U.S. financial institutions and European agencies ordered fresh bailouts after the second largest banking collapse in American history.
Questioned closely, sometimes aggressively, Yellen told senators at a Capitol hearing that the U.S. banking system “remains healthy” and Americans “can feel confident” about the safety of their deposits.
Her remarks, amid deepening concerns about the health of the global financial system, were an attempt to signal to markets that there would be no wider contagion. from the collapse of Silicon Valley Bank in California and Signature Bank in New York.
When her testimony was over, another major institution, First Republic Bank, received an emergency infusion of $30 billion in deposits from 11 banks, according to the Treasury Department. And in Europe hours earlier, Credit Suisse, Switzerland’s second-biggest lender got a promise from the Swiss central bank for a loan of up to 50 billion francs ($54 billion).
Wall Street is united on the rescue news.
Republican senators placed much of the blame for the problems on Democratic President Joe Biden’s administration.
“The reckless tax-and-spend agenda forced through Congress” contributed to record high inflation, which the Federal Reserve has to compensate for by raising interest rates, said Sen. Mike Crapo of Idaho. And these rising interest rates have caused problems for banks – as well as ordinary citizens.
Republicans also questioned Biden’s assurances that taxpayers will not bear the burden of the obligation to make depositors whole.
Yellen resisted that scenario, though she said, “We certainly need to carefully analyze what happened to trigger these bank failures and examine our regulations and oversight” to prevent them from happening again. She defended the government’s argument that taxpayers will not end up paying the cost of protecting uninsured money in Silicon Valley and Signature.
The Treasury Secretary was the first administration official to face lawmakers over the decision to protect uninsured money in the two failed regional banks, a move some have criticized as a bank “bailout”.
“The administration took decisive and forceful actions to strengthen public confidence” in the U.S. banking system, Yellen testified. “I can assure the members of the committee that our banking system remains sound and that Americans can feel confident that their deposits will be there when they need them.”
The week has been a whirlwind for markets globally on worries about banks that could buckle under the weight of the fastest rate hikes in decades, increases aimed at taming rising consumer price inflation.
In less than a week, Silicon Valley Bank, based in Santa Clara, Calif., failed after depositors rushed to withdraw money amid fears about the bank’s health. Then regulators met over the weekend and announced that New York-based Signature Bank also failed. They said all depositors, including those holding uninsured funds in excess of $250,000, would be protected by federal deposit insurance.
The Department of Justice and the Securities and Exchange Commission have since launched investigations into the Silicon Valley Bank collapse, and President Joe Biden has called on Congress to strengthen regulations for regional banks.
White House press secretary Karine Jean-Pierre said Thursday: “There are things we can do in the administration, but to really deal with this issue, we have to act. Congress has to act.”
Thursday’s hearing, originally scheduled to address Biden’s budget proposal for the fiscal year that begins next October, came after the sudden collapse of Silicon Valley, the nation’s 16th largest bank and a go-to financial institution for tech entrepreneurs. While lawmakers asked Yellen about the federal deficit and the upcoming debt ceiling talks, many focused instead on the bank failures and who was to blame.
The Biden administration’s “handling of the economy contributed to this,” insisted Sen. Tim Scott, RS.C. “I plan to hold regulators accountable.”
Late. Mark Warner, D-Va., asked, “Where were the regulators in all of this?”
“The nerves are certainly frayed at this moment,” said Sen. Ron Wyden, D-Ore., who chairs the committee. “One of the most important steps Congress can take now is to ensure that the full faith and credit of the United States is not in question,” he said, referring to raising the federal debt ceiling.
Late. Mike Crapo of Idaho, the committee’s top Republican, said, “I am concerned about the precedent of guaranteeing all deposits,” calling the federal bailout a “moral hazard.”
Yellen said on CBS’ “Face the Nation” last Sunday that a bank bailout was not on the table.
“We’re not going to do that again,” she said, referring to the government’s response to the 2008 financial crisis, which led to massive government bailouts of major US banks.
Yellen, a former Federal Reserve chair and former president of the San Francisco Federal Reserve during the 2008 financial crisis, was a leading figure in last weekend’s resolution, which was designed to prevent a broader systemic banking problem.
“This week’s actions demonstrate our resolute commitment to ensuring depositors’ savings remain safe,” she said.
Late. Sherrod Brown, D-Ohio, compared the collapse of the banks to lobbying for rail industry deregulation, which Democrats say contributed to the East Palestine train derailment that rocked an Ohio community. “We also see aggressive lobbying like this from banks,” he said.
In Europe, problems at Credit Suisse added to concerns about the global financial system.
The Swiss giant was in trouble long before the US banks collapsed, but news on Wednesday that the bank’s largest shareholder would not inject more money sent shares in European banks plunging. On Thursday, they rose after the action of the Swiss central bank.
Regulators in the United States and abroad are trying to reassure depositors that their money is safe. They “don’t want someone to be the person sitting in a dark room or darkened movie theater yelling fire, because that’s what makes us rush for the exits,” said Russ Mould, chief investment officer at online investment platform AJ Bell .
Despite the banking turmoil, the European Central Bank raised interest rates by half a percentage point in its latest effort to curb stubbornly high inflation, saying Europe’s banking sector is “resilient” with strong finances and plenty of available cash.
ECB President Christine Lagarde said the central bank will provide additional support to the banking system if needed. She said banks “are in a completely different position than 2008” because of safeguards added after the financial crisis.
ECB Vice President Luis de Guindos also said Europe’s exposure to Credit Suisse, which is outside the EU’s banking supervisory structure, was “quite limited.”
The Swiss bank, which has seen its shares slide for years, has been pushing to raise money from investors and roll out a new strategy to overcome a series of problems, including bad bets on hedge funds, repeated shake-ups of its top management and a spy scandal involving Zurich -competitor UBS.
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Associated Press writers Dave McHugh in Frankfurt, Germany, and Jamey Keaten in Geneva contributed to this report.
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