Yellen seeks to calm lawmakers amid banking turmoil

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Treasury Secretary Janet Yellen on Thursday sought to calm mounting concerns about financial instability as the banking industry reels over the collapse of two regional lenders.

The failure of Silicon Valley Bank and Signature Bank last week has kicked off a political battle around the government’s oversight of Wall Street as regional institutions face a flood of withdrawal requests from depositors.

With lawmakers drawing sides over arcane financial rules, Yellen’s appearance before the Senate Finance Committee offered an opportunity to test their lines of attack.

The Biden administration’s Sunday rescue plan for the Northern California bank’s customers, along with those of Signature — a New York institution that was shuttered that day — were essential for stemming a possible contagion that put “community banks across the country at great risk of runs,” Yellen said.

In her prepared testimony, the former Federal Reserve chair assured lawmakers that the banking system remains sound and that “Americans can feel confident that their deposits will be there when they need them.”

Still, lawmakers from both parties sounded alarms over the many failures that contributed to Silicon Valley Bank’s downfall.

“Nerves are certainly frayed at this moment,” Committee Chair Ron Wyden (D-Ore.) said at the start of the hearing.

Markets have been jittery over the last week amid fears the crisis could spread beyond regional banks. Investors dumped shares of institutions that may be facing a financial crunch with rising interest rates. Moody’s earlier this week downgraded its outlook for the entire U.S. banking industry, citing a “rapid and substantial decline in bank depositor and investor confidence.”

The bank run that sparked Silicon Valley Bank’s collapse on Friday left thousands of depositors — an overwhelming majority of whom weren’t covered by the FDIC’s deposit insurance limit of $250,000 — panicked that they wouldn’t be able to access their funds when banks opened on Monday morning.

Republicans who have scrambled to chart a united response to the Biden administration’s handling of the crisis criticized regulators for failing to intervene.

Sen. Tim Scott, a South Carolina Republican and possible 2024 presidential candidate, said a “lax regulatory environment” and deficient bank examiners allowed the failures of the SVB’s management team to slip through the cracks. Others, like Sen. Chuck Grassley (R-Iowa), said the implosion was a byproduct of a Biden-era economy that’s been stymied by soaring inflation and rising interest rates.

Yellen bristled at questions from Sens. James Lankford (R-Okla.) and Marsha Blackburn (R-Tenn.) about the potential long-term consequences of the rescue plan. The plan backstopped the banks’ uninsured depositors and made cash loans from the Fed available to lenders in exchange for safe collateral — an action that in theory would allow banks to handle deposit withdrawals of any amount for up to a year.

While Democrats are also urging federal agencies to examine regulatory shortfalls, many have also seized on the crisis as an opportunity to toughen standards around capital requirements and oversight.

“We certainly need to analyze carefully what happened to trigger these bank failures and reexamine our rules and supervision and make sure they’re appropriate for the risks banks face,” Yellen said.

This post was originally published on Politico

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