Treasury Secretary Janet Yellen tried to calm fears about the health of the U.S. banking system on Thursday, telling members of the Senate Finance Committee that Americans need not worry about their money in the banks.
The testimony was ostensibly about President Joe Biden’s 2024 budget proposal but instead the collapse of two banks in less than a week – Silicon Valley Bank and Signature Bank of New York – overshadowed the planned appearance.
Yellen, Fed Chairman Jerome Powell and Federal Deposit Insurance Corp. Chairman Martin Gruenberg on Sunday announced a broad plan to assure the depositors in those banks while also offering a security blanket of access to loans and other programs to the entire sector. This came after officials declared the collapse of SVB on Friday a “systemic” threat to the nation’s financial system.
“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 said in her opening testimony.
The Biden administration’s rescue has come in for criticism from both ends of the political spectrum. Conservatives such as Fox News commentator Tucker Carlson and Florida Gov. Ron DeSantis decried “woke” behavior at SVB based upon the firm’s embrace of diversity, equity and inclusion initiatives. Progressives such as Sen. Elizabeth Warren of Massachusetts railed against providing government support to a bank where a vast majority of accounts were above the $250,000 insurance offered depositors by the FDIC.
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Biden, Yellen and others took pains to say the rescue was not a “bailout” in that taxpayer’s money was not used, although the various federal banking regulators do operate with the implicit “full, faith and credit” of the government.
It’s unclear how well the plan will work. While deposits have been made available to customers of the failed banks and there have been no additional runs on the banks, the markets are still punishing small and regional banks now considered to be vulnerable. And yields on Treasury securities have cratered in a flight to the safety of government debt and fears the banking crisis is another warning sign of an impending recession.
“Absent a financial crisis, tighter credit and financial conditions will represent a drag on the US economy worth around 0.5% of GDP over the next 18 months,” said Greg Daco, chief economist at EY Parthenon. “We now anticipate real GDP growth will be closer to 0.8% in 2023 and around 1.5% in 2024.”
The crisis has spread to other countries. Credit Suisse, one of the world’s largest banks, saw its stock price plummet this week before the Swiss National Bank said it would provide as much as $54 billion in liquidity to the bank.
The concern over the health of the banking system and the sharp decline in market interest rates makes the Fed’s job even harder as it tries to curb inflation. A week ago, the markets had priced in a 50-basis-point hike when the central bank meets next week. But now analysts believe a smaller, or no, rate hike is more likely.
The European Central Bank went ahead with an expected hike of 50 basis points Thursday morning, with president Christine Lagarde saying inflation remains too high.
“The ECB is considered a ‘rules based’ central bank, rather than the Federal Reserve, which enjoys more flexibility in its decision making process,” said Quincy Krosby, chief global strategist for LPL Financial.
“The implications for the Fed’s meeting next week suggests that the Fed will raise rates 25 basis points based on futures probability, but will make it clear that the stability of the banking system remains strong,” he added. “However, should there be further deterioration within the regional banks, or another blowup, the Fed may consider a pause.”
The Dow Jones was down more than 200 points in the first hour of trading Thursday.
Committee members largely addressed the issue through their partisan lenses. Senate Finance Chairman Ron Wyden of Oregon used his opening remarks to blast Republicans over their stated interest in taking on Social Security and Medicare benefits while ranking minority member Mike Crapo of Wyoming attacked Democrats and Biden for proposing higher taxes and their “spending binge.”
Wyden took a swipe at Republicans who have said they will not raise the debt ceiling unless they get budget cuts.
“Nerves are frayed at the moment,” Wyden said. “One of the most important steps the Congress can take now is make sure there are no questions about the full faith and credit of the United States. That means paying the bills incurred by presidents of both parties and taking a default off the table.”