In an address to banking leaders on Tuesday, Treasury Secretary Janet Yellen said the U.S. was prepared for future banking rescues.
“Similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” she said. “I believe that our actions reduced the risk of further bank failures that would have imposed losses on the Deposit Insurance Fund, which is paid for through fees on insured banks.”
She stressed that the situation was different from bank failures of 2008.
The White House indicated that taxpayers would not finance the rescues this time around.
“Our banking system is sound even as it has come under some pressure,” Yellen said. “This is different from 2008.”
What led to the collapse of Silicon Valley Bank and others?
Like any other bank, it operated by taking a portion of deposits and creating loans — but this only works if there's enough deposited at once.
In that case, Yellen said, banks had sub-prime assets that caused them to fail. This time, she said banks were stressed by massive outflows, meaning customers with large accounts were making large withdrawals.
“Banks, of course, need access to liquidity when they face massive outflows. That was the reason, the motivation for the founding of the Fed. We need to make sure the Fed provides banks with the liquidity they need,” Yellen said.
Earlier this month, regulators seized Silicon Valley Bank and New York-based Signature Bank. The two seizures resulted in two of the three largest bank failures in U.S. history. Also, 11 major banks announced a combined $30 billion in uninsured deposits to keep First Republic Bank afloat.
The Federal Deposit Insurance Corporation insures deposits of up to $250,000. Had the FDIC not taken action, those with more than $250,000 were at risk of losing their accounts.
