Janet Yellen says US banking system 'remains sound' after SVB collapse

Treasury Secretary says there was 'serious risk of contagion' that could have affected other banks

Treasury Secretary Janet Yellen was the first member of the Biden administration to appear before Congress since federal regulators took over Silicon Valley Bank and New York's Signature Bank. AFP

Treasury Secretary Janet Yellen said Americans' deposits will be there when they need them as she sought to assuage banking crisis fears amid a turbulent period in the sector that has witnessed the second- and third-largest banking collapses in US history.

Ms Yellen was the first member of President Joe Biden's administration to appear before Congress since federal regulators took over Silicon Valley Bank and New York's Signature Bank.

“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,” Ms Yellen said in prepared remarks before the Senate Finance Committee.

Ms Yellen's testimony had been expected to focus on the Biden administration's budget for the 2024 fiscal year, but that was upended after SVB and Signature's collapses ignited banking crisis fears.

Federal regulators swooped in at the weekend to make sure the failed banks' depositors would be made whole. Investors in the banks, however, will not be protected by the government. The Federal Deposit Insurance Committee also created a bridge bank that now holds former SVB customers' deposits and assets.

“We felt that there was a serious risk of contagion that could have brought down and triggered runs on many banks,” she said.

“The government took decisive and forceful actions to strengthen public confidence” in the US banking system, Ms Yellen said in prepared remarks before the Senate finance committee.

“Importantly, no taxpayer money is being used or put at risk with this action.”

She told CBS's Face the Nation on Sunday that the administration's actions do not constitute a bailout.

The Justice Department and Securities and Exchanges Commission have both launched investigations into the SVB and Signature collapses.

Adding to global banking fears, Credit Suisse shares plummeted on Wednesday after its top shareholder announced it would not be adding further investment. Shares in Credit Suisse rebounded on Thursday after it received a $54 billion lifeline from the Swiss central bank.

The Treasury Department said it was reviewing the US financial sector's exposure to Credit Suisse, Bloomberg reported.

Ms Yellen did not mention Credit Suisse in her opening remarks.

SVB collapsed last week after a run on deposits, of which more than 97 per cent were uninsured.

Ms Yellen said the bank needed to sell assets that it expect to hold to maturity, but the $22 billion worth of securities was sold at a loss in light of the Fed's interest rate.

“And given the interest rate increases … they had lost market value,” she said.

Banks can make more money when interest rates rise because they can earn more on interest from loans they create. But by doing so, they run the risk of decreasing the value of securities.

Ms Yellen said there will be “a careful look” at SVB and what had caused the problem.

“We certainly need to analyse carefully what happened,” she said.

The recent banking turmoil has raised fears of a recession. Citing the stress small banks currently face, Goldman Sachs raised the probability rate of the US entering a recession in the next 12 months to 35 per cent.

The Fed has taken an aggressive monetary policy stance in an attempt to bring down the inflation rate, which remains elevated at 6 per cent. Fed Chairman Jerome Powell had previously hoped for what he called a soft landing, but now says the process of returning inflation back down to the central bank's 2 per cent goal would be “bumpy”.

The recent turbulence in the banking sector has thrown the Federal Reserve's interest rate plans into disarray. The central bank was expected to resume its aggressive raises next week after issuing a 25-basis-point increase last month, but traders now expect policymakers to issue another smaller rate increase.

Raising interest rates too aggressively also runs the risk of tipping the US into a recession and pushing millions of people into unemployment by slowing growth too aggressively or encouraging companies to lay off their employees.

The Fed said the unemployment rate — which sits at 3.4 per cent today — could reach 4.6 per cent by the end of the year, leaving two million people without work.

Ms Yellen said inflation remains the Biden administration's top priority and that it is “highly critical” for the Fed to address it.

Agencies contributed to this report