After taking significant action to secure Silicon Valley Bank (SVB) and Signature Bank, Treasury Secretary Janet Yellen says the U.S. government will provide the same protections for smaller banks.
Key Details
- During an American Bankers Association conference this week, Secretary Yellen assured bankers that the federal government would protect small banks just as much as larger ones.
- “Our intervention was necessary to protect the broader U.S. banking system, and similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” Yellen says.
- After SVB and Signature Bank Collapsed earlier this month, federal regulators guaranteed both insured and uninsured deposits at the banks to slow the tide of customers moving to larger banks.
- Some officials have suggested that federal deposit insurance should be temporarily expanded to cover all deposits. Yellen did not address this suggestion in her comments.
Why it’s news
Yellen’s comments come after two weeks of growing concerns over financial stability following the rapid collapse of two U.S. banks. Over the weekend, UBS Group AG bought its rival Credit Suisse Group AG.
First Republic Bank, which is struggling to maintain customer confidence after taking a plunge, received a $30 million boost from big banks led by JPMorgan Chase.
According to some mid-sized banks, the best way to stop a potential crisis is for the federal government to insure all deposits temporarily, Bloomberg reports. Yellen did not address this idea or give any insight into what regulations may be implemented to prevent a repeat of the last several weeks.
Yellen made a point to emphasize that the Treasury is interested in preserving small and mid-sized banks within the financial system—not just the larger banks.
“Large banks play an important role in our economy, but so do small- and mid-sized banks,” she says. “Treasury is committed to ensuring the ongoing health and competitiveness of our vibrant community and regional banking institutions.”
Still, many investors are warning that the Silicon Valley Bank (SVB) bank bailout was a mistake and will incentivize riskier financial behavior.
Citadel founder Ken Griffin told the Financial Times that the U.S. shouldn’t have protected depositors for SVB and that the bailout reflects a loss of financial discipline.
AQR Capital Management founder Clifford Asness tweeted that the bailouts create a moral hazard, as a reduced incentive for making financial mistakes increases risks.
Muddy Waters Capital founder Carson Block says depositors should be responsible for risks, and bailouts send the wrong message to banks.
