Yellen: Uninsured depositors at small banks protected if contagion risk exists

Federal regulators would provide similar protections for uninsured depositors at smaller banks as they did for Silicon Valley Bank and Signature Bank, if there is evidence the failures of those smaller banks would pose a larger contagion risk, Treasury Secretary Janet Yellen said today. Speaking at the ABA Washington Summit and clarifying congressional testimony she provided last week, Yellen said the government’s recent actions were not focused on aiding specific banks or classes of banks.

“Our intervention was necessary to protect the broader U.S. banking system,” Yellen said. “And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion. 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.”

During a Q&A with ABA President and CEO Rob Nichols following her speech, Yellen reiterated the Biden administration’s message that the banking system is sound and said that aggregate deposit outflows at regional banks have stabilized. Yellen also said that while the current crisis may lead regulators and policymakers to evaluate whether regulatory adjustments are needed, she didn’t want to speculate on what those may be at this time. “What I’m focused on is stabilizing the system and restoring the confidence of consumers,” she said.

Treasury can’t prioritize payments in debt default

The U.S. Treasury does not have the capability to prioritize government payments should Congress fail to raise the debt limit later this year, Yellen said. Asked her views on the current debt ceiling impasse, the Treasury secretary said defaulting on the debt would be “absolutely catastrophic” for the nation’s economy. She added that while some lawmakers have suggested the Treasury could prioritize payments to avoid some of the worst short-term fallout, the reality is the system isn’t designed to do that.

“The Treasury makes absolutely millions of payments every day and our system is built to pay our bills on time, not wait [to pay]bills or try to sort payments into different categories and pay some ahead of others,” Yellen said. “There’s a good reason that Treasury secretaries in both parties have rejected the idea of prioritization as a risky and dangerous idea.”