Yellen Defends Admin's Response to Bank Failures, Senators Question Precedent of Covering All Deposits
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Treasury Secretary Janet Yellen addressed members of Congress Thursday under a dark cloud of financial turmoil lingering over her hearing.
Yellen's testimony came after the second-largest banking collapse in U.S. history.
The secretary tried to stress that the country's financial system remains strong after the government took emergency measures to help Silicon Valley and Signature Bank customers get their money this week.
"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 told the Senate Finance Committee.
SVB was crushed after long-term bond investments it had invested in lost value. Yellen was pressed on if that had to do with the response to record inflation.
"I attribute that to the interest rate hikes we're seeing, am I wrong in that?" Sen. Mike Crapo (R-ID) asked.
"Given the interest rate increases that have occurred since those assets, including treasury and government-backed securities, they had lost market value," Yellen replied.
SVB's tech industry clients rushed to withdraw their money, sparking a run that the government tried to step in and stop. The move guaranteed customers money even those holding above the FDIC-insured amount of $250,000.
"Most of us have all seen It's a Wonderful Life, we realize that the money was often in small businesses and startup businesses around the country. The question I have is, who was playing the role of Mr. Potter?" Sen. Mark Warner (D-VA) asked.
Warner's concern was focused on the bank run stirred up by social media.
"If a bank has an overwhelming run that's spurred by social media or whatever so that's it's seeing deposits flee at that pace, a bank could be put in danger of failing," Yellen noted.
The Treasury Secretary defended the Biden administration's efforts as senators pressed about the potential precedent being set by guaranteeing all deposits for the failed banks. Some worried other banks would see it as the new normal and a bailout.
Tennessee Republican Sen. Marsha Blackburn asked if the government's measures were a step towards nationalizing the banking system.
"Absolutely not, I see this as a step toward stemming contagion that could come from the failure of these banks that would place community banks across the country at great risk of runs," Yellen responded.
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