Janet Yellen says US banking system ‘remains sound’ despite bank failures

Treasury secretary Janet Yellen has told a Senate committee that the US banking system is “sound” and defended the Biden administration’s actions to rescue depositors at two failed banks and thwart broader financial contagion.

Yellen was grilled by lawmakers on the Senate finance committee regarding the aggressive intervention by US regulators and officials on Sunday to guarantee all deposits at the collapsed Silicon Valley Bank and Signature Bank and set up a new Federal Reserve facility to provide liquidity to other banks.

“I can reassure the members of the committee that our banking system is sound, and that Americans can feel confident that their deposits will be there when they need them,” Yellen said in her opening remarks. “This week’s actions demonstrate our resolute commitment to ensure that our financial system remains strong and depositors’ savings remain safe.”

In some of the early exchanges at the hearing, Yellen was pressed on what caused the trouble at SVB. “There was a run on the bank,” she answered, adding that there was a “massive withdrawal of deposits” that led to “liquidity problems”.

She said her understanding was that SVB had to “sell assets that it expected to hold to maturity” but they had lost “market value” in light of the recent interest rate increases.

Although the US government’s actions stabilised markets early in the week, turmoil at Credit Suisse, the Swiss bank, has added to jitters among investors.

Most Democratic lawmakers have praised President Joe Biden’s administration for taking action to protect the banking system, and blamed a rollback of financial regulation under Donald Trump for paving the way for the crisis.

But some Republicans have charged that US officials and regulators mismanaged the financial system by keeping borrowing costs too low for too long during the coronavirus pandemic, fuelling inflation and forcing the Fed to increase interest rates so quickly it hurt some banks.

“Inflation played a key role in the recent bank failures, as rising interest rates and mismanaged interest rate risk led to a liquidity crisis,” said Mike Crapo, the Idaho senator and top Republican on the panel.

While some have suggested that Biden’s actions were appropriate, others have criticised it as another dangerous bailout. But in her opening remarks before the Senate committee, Yellen justified the administration’s moves, along with those of the Fed and the Federal Deposit Insurance Corporation.

“The government took decisive and forceful actions to strengthen public confidence in our banking system,” she said. “On Monday morning, customers were able to access all of the money in their deposit accounts so they could make payroll and pay the bills.”

The actions to guarantee all deposits at SVB were needed after US regulators failed to find a buyer for the bank last weekend. Yellen rejected a suggestion by Crapo that the FDIC had “slow-walked” the talks because of a “political backlash” against any sale. The Treasury secretary said M&A was “certainly something that they were open to”.

Ron Wyden, the Democratic chair of the Senate finance committee, opened the hearing by conceding that “nerves are frayed” in the wake of the banking failures, but called on Republicans to drop their resistance to an increase in the US debt ceiling without any conditions.

The session had been called as a chance for lawmakers to question Yellen on the administration’s budget proposals, so many of the exchanges focused on fiscal policy.