SVB collapse: Yellen assures Congress banking system is ‘sound’
Zachary Halaschak
Treasury Secretary Janet Yellen testified before Congress for the first time since Silicon Valley Bank failed and defended the administration’s action to prevent a broader financial crisis.
Yellen appeared before the Senate Finance Committee on Thursday during planned testimony about President Joe Biden’s proposed budget, although the budget was largely overshadowed by SVB’s sudden collapse and the fallout from the failure.
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“This week, the government took decisive and forceful actions to strengthen public confidence in our banking system,” Yellen said. “I can reassure 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.”
After the SVB collapse on Friday, regulators convened to discuss how to shore up the United States banking system. The federal government then announced that it would back all deposits in SVB and Signature Bank, even those in excess of the FDIC’s $250,000 threshold, in an effort to stop a run on other banks and a hit to the broader economy.
The Fed also rolled out a new source of funding for banks that might face runs by depositors, called the Bank Term Funding Program.
Finance Committee Ranking Member Mike Crapo (R-ID) asked Yellen if she agreed that the main issue at play in the SVB collapse was a liquidity risk. She said that there were liquidity issues with SVB but emphasized that there was a run on the bank, which entailed a wave of depositors trying to pull money out to avoid losing it.
“There was a run on the bank, it had high reliance on uninsured deposits, and there was a massive withdrawal of deposits that led to liquidity problems. The bank had to be closed for that reason,” Yellen responded.
“There will be a careful look at what happened in the bank and what initiated this problem, but clearly, the downfall of the bank — the reason it had to be closed — was that it couldn’t meet depositors’ withdrawal requests,” she added.
Crapo pointed out the bank’s assets were losing value because the Federal Reserve has been forced to raise interest rates at an aggressive pace over the past year in an effort to drive down inflation, which made the bank’s holdings of Treasury and other loans less valuable. Crapo also said it would have been better to find a private-sector solution to the SVB collapse.
“The solution would have been to get a private-sector solution that protected taxpayers, calmed the markets, and prevented the potential assessments from being inappropriately levied against community banks,” he said.
Lawmakers also used the hearing to discuss the debt ceiling and the looming battle over raising it. That fight is expected to come to a head early this summer, and Finance Committee Chairman Ron Wyden (D-OR) emphasized how bad it would be for the economy if the U.S. came even close to defaulting on its obligations.
“One of the most important steps Congress can do now is to make sure there are no questions about the full faith and credit of the United States,” Wyden said about the prospects of a bruising debt limit fight.
One idea that has been discussed is the idea that the Treasury could attempt to prioritize payments — that is, paying some bills while allowing others to go unpaid. Such maneuvers have been contemplated before but have always been rejected as unworkable by the Treasury.
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Yellen on Thursday further pushed back on the notion of prioritization.
“We believe, I believe, that prioritization of payments, as you said, is default by another name,” Yellen told Wyden. “We need to pay our bills, we need to pay all of our bills. That willingness and commitment to being responsible and paying the bills that have already been incurred is what underlies the United States’ strong credit rating.”