WASHINGTON — Treasury Secretary Janet L. Yellen this week defended moves by the Biden administration and federal regulators to stabilize the U.S. financial system, saying the moves are aimed at preventing problems from spreading through the banking system.
Ms. Yellen also sought to reassure the public during a hearing before the Senate Finance Committee that America’s banks are “sound” and that their deposits are safe.
The comments were the first by Ms. Yellen from the Treasury secretary and other federal regulators moved prop up the financial system and limit the fallout from the collapse of Silicon Valley Bank. On Sunday, the Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corporation announced that they will ensure that all depositors at Silicon Valley Bank and Signature Bank, which regulators also seized, are repaid in full.
“We wanted to make sure that the problems at Silicon Valley Bank and Signature Bank did not undermine confidence in the health of banks across the country,” Yellen said. “We wanted to make sure there was no contagion that could affect other banks and their depositors.”
Ms. Yellen played a central role in the rescue effort that took place last week when she finally declared that Silicon Valley Bank posed a “systemic” threat to the economy. That decision opened the door for the Federal Reserve and the Federal Deposit Insurance Corporation to guarantee uninsured deposits at failing banks.
On Thursday, Ms. Yellen explained that because of the nature of the attack on Silicon Valley Bank, she and other regulators worried that the turmoil could spread and cause other banks to face similar cash outflows.
Despite these actions, Ms. Yellen said the United States is not taking a step toward nationalizing the banking system. Although there have been suggestions that all of the country’s deposits are effectively insured — rather than deposits under $250,000 — the Treasury secretary clarified that any such guarantees would have to be approved by federal regulators and the Biden administration.
The bank collapse and subsequent market turmoil led to finger-pointing over whether the 2018 rollback of some financial regulations in the Dodd-Frank Act was responsible for the bank failures.
Republicans on the committee also anticipated potential political attacks, arguing that Mr. Biden’s spending policies had fueled inflation and prompted the need for the Federal Reserve to raise interest rates. This, they argued, destabilized Silicon Valley Bank by eroding the value of its long-term Treasuries and mortgage-backed securities.
Ms. Yellen called for a review of banking rules and supervision to “make sure they are appropriate to address the risks banks face.” But she suggested that no matter how strong a bank’s capital and liquidity supervision is, a bank could be at risk of failure if there is a “huge surge” fueled by social media.