WASHINGTON (AP) — Treasury Secretary Janet Yellen offered tight, cheery reassurances to bank depositors and investors on Thursday even as US financial institutions and European agencies ordered new bailouts After the second largest bank failure in US history.
Yellen was questioned closely, sometimes aggressively, and told senators at a Capitol hearing that the U.S. banking system “remains healthy” and Americans “can be confident” their deposits are safe.
His remarks, amid deepening concerns about the health of the global financial system, were an attempt to signal to the market that there was no wider contagion On the collapse of California’s Silicon Valley Bank and New York’s Signature Bank.
After his testimony was over, another large institution, First Republic Bank, received $30 billion in deposits from 11 banks, according to the Treasury Department. And in Europe, hours earlier, Credit Suisse, Switzerland’s second-largest lender received a promise from the Swiss National Bank to lend up to 50 billion francs ($54 billion).
Wall Street rallied in rescue news.
Republican senators blamed much of the problem on the administration of Democratic President Joe Biden.
A “reckless tax-and-spend program forced through Congress” contributed to record inflation, which the Federal Reserve will have to offset by raising interest rates, said Idaho Sen. Mike Crapo. And rising interest rates have caused problems for banks – as well as ordinary citizens.
Republicans also questioned Biden’s assurances that taxpayers would not have to bear responsibility for the commitment to make depositors whole.
Yellen resisted that scenario, though she said, “We really need to carefully analyze what happened to bring these banks down and examine our rules and oversight” to prevent them from happening again. He defended the government’s argument that taxpayers should not have to pay the cost of protecting uninsured money in Silicon Valley and Signature.
The Treasury Secretary was the first administration official to confront lawmakers about the decision to protect uninsured money at two failed regional banks, a move some have criticized as a bank “bailout”.
“The administration took decisive and strong action to strengthen public confidence” in the U.S. banking system, Yellen testified. “I can assure the members of the committee that our banking system will remain healthy and that the American people can trust that their deposits will be there when they need them.”
The week has been a whirlwind in the markets worldwide Concerns about banks that could buckle under the weight of the fastest rate hikes in decades, increases aimed at curbing rising consumer price inflation.
Less than a week, Silicon Valley Bank, based in Santa Clara, Calif., failed after depositors rushed to withdraw money worried about the bank’s health. Then regulators met over the weekend and announced that New York-based Signature Bank had also failed. All depositors, including uninsured funds of more than $250,000, would be protected by federal deposit insurance, they said.
The Ministry of Justice and the Securities and Exchange Commission have since launched investigations to the collapse of Silicon Valley Bank, and President Joe Biden has called on Congress to strengthen regional bank regulations.
White House press secretary Karine Jean-Pierre said Thursday that there are things the administration can do, but to really address this issue, we have to act. Congress must act.”
Thursday’s hearing, which was originally supposed to deal with Biden’s budget proposal for the fiscal year starting next October, after the sudden collapse of Silicon Valley, the country’s 16th largest bank and financial institution for technology entrepreneurs. While lawmakers questioned Yellen on the federal deficit and 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’m going to hold the regulators accountable.”
Sen. Mark Warner, D-Va., asked, “Where were the regulators in all of this?”
“The nerves are certainly frayed right now,” 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 called into question,” he said, referring to raising the federal debt ceiling.
Sen. Mike Crapo of Idaho, the top Republican on the committee, 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,” he said, referring to the government’s response to the 2008 financial crisis that led to major bailouts of U.S. bank boards.
Yellen, a former Federal Reserve chair and former president of the San Francisco Fed during the 2008 financial crisis, was a leading figure in last weekend’s resolution designed to prevent a broader systemic banking problem.
“This week’s action demonstrates our resolute commitment to ensure that depositors’ savings remain safe,” he said.
Sen. Sherrod Brown, D-Ohio, compared the bank collapse to lobbying for rail deregulation, which Democrats say contributed to the train derailment in East Palestine that shocked the Ohio community. “We’re also seeing aggressive lobbying from the banks,” he said.
In Europe, Credit Suisse’s problems deepened concerns about the global financial system.
The Swiss giant was in trouble long before the collapse of US banks, but news on Wednesday that the bank’s biggest shareholder would not inject more money sent shares of European banks tumbling. On Thursday, they rose after the action of the Swiss National Bank.
Regulators in the United States and abroad are trying to reassure depositors that their money is safe. They “don’t want anyone to be the person sitting in a darkened room or in a darkened movie theater yelling fire because that creates a rush to exit,” said Russ Mould, chief investment officer at online investment platform AJ Bell.
Despite the banking turmoil, the European Central Bank raised interest rates half a percentage point in its latest bid to curb stubbornly high inflation, saying Europe’s banking sector is “resistive” with a strong economy and plenty of cash.
ECB President Christine Lagarde said that the central bank will provide additional support to the banking system if necessary. He said banks “are in a completely different position than they were in 2008” because of the safeguards added after the financial crisis.
ECB Deputy Governor Luis de Guindos also said Europe’s exposure to Credit Suisse, which is outside the European Union’s banking supervision structure, is “fairly limited.”
The Swiss bank, whose shares have been falling for years, has been scrambling to raise money from investors and adopt a new strategy to tackle a series of problems, including bad bets on hedge funds, frequent top management changes and a spying scandal involving Zurich rival 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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