If bank crisis expands, feds can protect small lenders: Janet Yellen

Treasury Secretary Janet Yellen told bankers on Tuesday that the federal government will backstop deposits at smaller lenders if necessary as the Biden administration aims to reassure the public that the banking system is stable.

“The steps we took were not focused on aiding specific banks or classes of banks,” Yellen said at the American Bankers Association conference in Washington.

“Our intervention was necessary to protect the broader US banking system.” the Treasury secretary added.

“And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”

Yellen’s remarks come amid reports that the Biden administration is examining ways to temporarily expand the Federal Deposit Insurance Corp. to cover all bank deposits in hopes of weathering the financial storm and preventing a full-blown crisis.

Treasury Department officials are looking into whether federal regulators have enough emergency authority to insure deposits above the current $250,000 cap on accounts without the consent of Congress, according to the report by Bloomberg News.

But some Republicans in Congress have balked at supporting the move.

The Republican House Freedom Caucus said in a statement the Federal Reserve “must unwind” its extraordinary funding facility created on March 12 that allows banks to boost borrowing from the Federal Reserve to cover deposit outflows.

The Bloomberg report cites people with knowledge of the discussions as saying that such a move is not necessary at the moment given that federal agencies have already committed to backstopping potential withdrawals.

Nonetheless, Biden administration officials are doing their due diligence in case the situation deteriorates.

“Due to decisive recent actions, the situation has stabilized, deposit flows are improving and Americans can have confidence in the safety of their deposits,” a Treasury Department spokesperson told Bloomberg.

Still, the fact that discussions about expanding the FDIC are ongoing is an indication of the level of concern in Washington that more dominoes could fall following the collapse of Silicon Valley Bank, Signature Bank, the fintech lender Silvergate Bank, and Credit Suisse, the Swiss giant that was bought out for cheap by its rival UBS over the weekend.

Global financial observers are concerned about the stability of First Republic Bank, the San Francisco-based regional lender that received an emergency $30 billion aid package from 11 of the nation’s largest banks last week.

Jamie Dimon, the CEO of JPMorgan Chase, the nation’s largest bank, is reportedly leading discussions with counterparts at other financial institutions over a more comprehensive rescue of First Republic.

Trading in First Republic shares was halted numerous times on Monday due to the volatility.

The shares, which fell by another 47% on Monday, have dropped around 88% in the past two weeks.

First Republic stock showed signs of life in pre-market trading on Tuesday as shares jumped by some 21%.

Other regional bank stocks were also trending upwards just before the opening bell on Tuesday.

Zions Bancorp was up more than 5.6% in pre-market activity while PacWest surged by more than 12%.

With Post wires