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Treasury Secretary Prepared to Take “Additional Action” to Protect Bank Deposits

Treasury Secretary Prepared to Take “Additional Action” to Protect Bank Deposits

Treasury Secretary Janet Yellen has suggested that her department would be willing to provide additional backing for bank deposits if necessary, only a day after seemingly ruling out the possibility.

Yellen’s comments initially caused brief fluctuations in bank stocks, which then continued their downward trend.

Are Deposits Backstopped or Not?

In her prepared testimony before the House Appropriations Subcommittee on Wednesday, Yellen reiterated comments from the day prior, explaining that the government’s recent actions were intended to ensure the safety of American deposits.

However, Yellen removed a key line from Wednesday’s testimony asserting that “the U.S. banking system is safe and sound,” replacing it with a statement that the Treasury “would be prepared to take additional actions if warranted.”

“As I have said, we have used important tools to act quickly to prevent contagion,” said Yellen. “and they are tools we could use again. The strong actions we have taken ensure that Americans’ deposits are safe.”

Yellen’s statements appear to contradict her comments before another Senate subcommittee, in which she stated that the Treasury was not considering a blanket guarantee on bank deposits without congressional approval, causing bank stocks to fall. Her flip-flopping on the issue has led some industry analysts to question the government’s handling of a potential banking crisis.

Backstopping Everything

Billionaire Bill Ackman suggested that deposit outflows would likely accelerate quickly in response to the Treasury’s objections to a system-wide deposit guarantee on Wednesday. He added that this outflow would be spurred on by the unattractiveness of bank deposits due to the Fed raising its policy rate to 5% that same day.

“A temporary systemwide deposit guarantee is needed to stop the bleeding,” he added. “The longer the uncertainty continues, the more permanent the damage is to the smaller banks, and the more difficult it will be to bring their customers back.”

Yellen has previously stated that the Fed would only be willing to backstop deposits at banks deemed to present “systemic risk” to the financial system. Critics have argued that such a policy would dissuade bank customers from keeping their deposits with smaller banks, creating a two-tiered system.

The stock price of First Republic Bank fell another 6% on Thursday, while Deutsche Bank’s fell 3% as credit-default swaps insuring against the bank’s insolvency surged to highs not seen since early 2020.