Yellen: US Will Back Small Banks to Fend off ‘Contagion’

According to U.S. Treasury Secretary Janet Yellen, the government may not be done taking dramatic measures to protect banks.

Speaking at the American Bankers Association summit Tuesday (March 21) Yellen said the U.S. could take steps similar to the ones it took to shore up Signature and Silicon Valley banks if other smaller lenders are in danger.

“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 said. “I believe our actions reduced the risk of further bank failures.”

Earlier this month, U.S. regulators took emergency action to restore confidence following the collapse of the two banks by guaranteeing both uninsured and insured deposits at both lenders.

In her talk Tuesday, Yellen said there might be some “adjustments” to regulations to prevent further crises, but she declined to speculate about what that might look like.

“What I’m focused on is stabilizing our system and restoring the confidence of our depositors,” she said.

Nevertheless, this week also saw federal officials considering ways to expand deposit protections to stave off a further crisis.

Treasury staff was studying whether regulators had the authority to temporarily insure deposits above the traditional $250,000 threshold without Congressional approval.

Officials don’t see such a need following the government’s efforts to shore up Signature and SVB, although they are working on a plan in case the banking crisis worsens.

In the two weeks since the crisis began unfolding, officials have sought to reassure the public that the banking system is sound, even as the situation spread.

Last week, a group of the country’s 11 largest banks banded together to inject $30 billion into another struggling lender, First Republic Bank.

And those banks could invest further in First Republic, which has continued to see its stock dive despite the intervention of titans such as Bank of America and Wells Fargo.

First Republic Bank’s stock hit an all-time low, falling another 17% Monday morning and shedding more than 80% of its value in March. Although withdrawals from the bank slowed following the $30 billion deposit, the bank still faces a hole in its balance sheet.

At the same time, investors and customers are still concerned about the bank’s future as a large share of its deposits are uninsured — as was the case with the now-failed SVB.