US bank failures ‘very different’ from 2008 crisis, Yellen says

US treasury secretary hails government intervention to guarantee depositors’ money and says banking system is ‘sound’.

United States Treasury Secretary Janet Yellen says government intervention after failure of two banks aimed to 'protect the broader US banking system' [File: Greg Nash/Pool via Reuters]

US Treasury Secretary Janet Yellen has said that the United States banking system is “sound”, stressing that recent American bank failures are “very different” from the global financial meltdown of 2008.

Speaking at the American Bankers Association on Tuesday, Yellen said the US government’s intervention in the wake of this month’s collapse of Silicon Valley Bank (SVB) and Signature Bank helped contain the fallout.

“The situation is stabilising, and the US banking system remains sound,” Yellen said.

The US government moved quickly to respond to the crisis – the second-largest banking failure in US history – by seizing the two banks and guaranteeing the money of all their respective depositors, even those who were uninsured.

Yellen suggested on Tuesday that the US government may continue to guarantee all deposits in cases of further bank failures. “Similar actions could be warranted if smaller institutions suffered deposit runs that pose the risk of contagion,” she said.

Yellen added that Washington also helped reduce risks to the system by creating a lending initiative, dubbed the Bank Term Funding Program (BTFP), to provide additional liquidity to financial institutions and “help banks meet the needs of all of their depositors”.

“Let me be clear: The government’s recent actions have demonstrated our resolute commitment to take the necessary steps to ensure that depositors’ savings and the banking system remain safe,” she said.

US regulators closed SVB on March 10 after it experienced a bank run – a rush by depositors to withdraw their funds all at once. Specialised in lending to technology startups and the venture capitalists who finance them, the California-based institution had invested much of its money in US government bonds, whose value fell as interest rates rose.

A second bank, New York-based Signature, also failed.

Yellen and other US officials have sought to defend the government’s interventions amid concerns and public frustration around its decision to effectively bail out financial institutions that critics say were mismanaged.

The administration of US President Joe Biden insists that its recent actions do not constitute a bailout.

Reverberations of the current turmoil have been felt at banks across the world. Late last week, US banking giants pledged to deposit $30bn to prop up a struggling California-based lender, First Republic Bank, in a move welcomed by Washington.

The failures of SVB and Signature Bank and tumbling banking stocks had raised fears of a broader economic collapse similar to the 2008 financial crisis. But Yellen said on Tuesday that the two situations are not the same.

“We do know that the recent developments are very different than those of the global financial crisis,” she said.

“Back then, many financial institutions came under stress due to their holdings of subprime assets. We do not see that situation in the banking system today. Our financial system is also significantly stronger than it was 15 years ago. This is in large part due to post-crisis reforms that provided stronger capital standards, among other important improvements.”

Two years after the 2008 meltdown, US lawmakers passed a sweeping Wall Street reform law. But some of its regulations were rolled back in 2018 with bipartisan support.

Last week, Biden called on Congress to tighten regulations in order to hold the executives of failed banks accountable for “mismanagement and excessive risk-taking”, including by banning them from working in the industry.

“The president believes that if you’re responsible for the failure of one bank, you shouldn’t be able to just turn around and lead another,” the White House said in a statement.

Source: Al Jazeera