Janet Yellen: Further rescues of depositors could be needed if smaller lenders suffer bank runs

The federal government could once again come to the rescue of uninsured bank depositors if smaller lenders suffer bank runs like the one that collapsed Silicon Valley Bank, according to prepared remarks from US Treasury Secretary Janet Yellen.

Yellen argues the government’s “decisive and forceful actions” have successfully calmed the banking crisis and boosted confidence in the system.

“The situation is stabilizing. And the US banking system remains sound,” Yellen said in the remarks, to be delivered at the American Bankers Association’s Washington DC Summit on Tuesday.

Yellen said a new lending facility launched by the Federal Reserve along with its existing discount window are “working as intended to provide liquidity to the banking system.” She said deposit outflows from regional banks, in aggregate, have “stabilized.”

Fearing a series of bank runs, the Federal Deposit Insurance Corporation stepped in to protect all depositors — even those above the $250,000 insurance limit — after Silicon Valley Bank and Signature Bank failed.

“Our intervention was necessary to protect the broader US banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” Yellen said, adding that officials were not focused on “aiding specific banks or classes of banks.”

Yellen added that the US actions “reduced the risk of further bank failures” that would have drained the FDIC’s insurance fund.

Regional bank stocks have been volatile ever since the bank failures, with some lenders such as First Republic experiencing dramatic declines.

The industry-led rescue of First Republic, announced last week by some of the biggest US banks, represents a “vote of confidence in our banking system,” Yellen said.

The bank failures have sparked a rush of deposits away from small and medium-sized lenders in favor of the biggest banks.

Yellen emphasized that while large banks play a central role in the US economy, so do small and mid-sized banks, noting they provide credit and financial support to families and small businesses and often have specialized knowledge of their communities.

“Treasury is committed to ensuring the ongoing health and competitiveness of our vibrant community and regional banking institutions,” Yellen said.