Finance Minister Yellen says not all uninsured deposits will be protected in future bank failures


WASHINGTON — Treasury Secretary Janet Yellen on Thursday sought to reassure markets and lawmakers that the federal government is determined to protect U.S. bank deposits following the weekend’s bankruptcy of Silicon Valley Bank and Signature Bank.

“Our banking system remains healthy and Americans can be confident that their deposits will be there when they need them,” Yellen said in testimony before the Senate Finance Committee.

However, when questioned, Yellen admitted that not all depositors will be protected above the $250,000 per account FDIC insurance limits, as they did for clients of the two bankrupt banks.

A Silicon Valley Bank office in Tempe, Arizona, on March 14, 2023.

Rebecca Nobel | AFP | Getty Images

Yellen has been at the center of federal emergency efforts this past week to recover deposits from account holders at two bankrupt banks, California-based SVB and New York-based crypto-heavy Signature Bank.

A majority of SVB’s clients were small technology companies, venture capital firms and entrepreneurs who used the bank for day-to-day cash management to run their businesses. Those customers had $175 billion on deposit with tens of millions in individual accounts. As a result, SVB had one of the highest shares of uninsured deposits in the country when it collapsed, with 94% of its deposits falling above the FDIC’s $250,000 insurance limit, according to 2022 data from S&P Global Market Intelligence.

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U.S. banking regulators on Sunday announced a plan to fully insure all deposits at the two bankrupt banks, including those above the $250,000 limit covered by traditional FDIC insurance. The additional protection is paid from a special fund consisting of fees levied on all FDIC-insured institutions.

In addition, the Federal Reserve relaxed its lending guidelines for banks seeking short-term funding through the so-called discount window. It also set up a separate unrestricted facility to offer one-year loans on looser terms than usual to support troubled banks facing a surge in cash withdrawals. Both programs are paid for through industry taxes, not taxpayers, the Biden administration stressed.

“This will help financial institutions meet the needs of all their depositors,” said Yellen. “This week’s actions demonstrate our determination to ensure that depositors’ savings remain safe.”

Democrats and Republicans in Congress have largely supported last week’s emergency measures. But with markets recovering somewhat, lawmakers asked Yellen on Thursday whether big bank backstops will become the new normal, and what that might mean for community lenders.

“I’m concerned about the precedent of guaranteeing all deposits and future market expectations,” Sen. Mike Crapo, R-Idaho, the commission’s senior member, said in his opening remarks.

People line up outside a Silicon Valley Bank office on March 13, 2023 in Santa Clara, California.

Justin Sullivan | Getty Images

Oklahoma Republican Senator James Lankford urged Yellen how broadly uninsured deposit backstops will apply in the banking sector.

“Will deposits at every community bank in Oklahoma, regardless of size, be fully insured now?” asked Lanford. “Are they getting the same treatment that SVB just got, or just Signature Bank?”

Yellen acknowledged that they would not.

Uninsured deposits, she said, would only be covered in the event that “failing to protect uninsured depositors would create systemic risk and significant economic and financial consequences.”

Lankford said the impact of this default would be that small banks would be less attractive to depositors with more than $250,000, the current FDIC insurance threshold.

U.S. Treasury Secretary Janet Yellen answers questions about the Biden administration’s plans following the collapse of three U.S. lenders, including Silicon Valley Bank and Signature Bank, as she testifies before a Senate Finance Committee hearing on the proposed budget request of U.S. President Joe Biden for Fiscal Year 2024, on Capitol Hill in Washington, March 16, 2023.

Mary F. Calvert | Reuters

“I’m concerned that you’re… encouraging anyone who has a large deposit at a community bank to say, ‘We’re not going to make you well, but if you go to one of our preferred banks, we’ll help you.’ all.'”

“That’s certainly not something we encourage,” replied Yellen.

Members of Congress are currently considering a number of legislative proposals designed to prevent the next Silicon Valley Bank-type bankruptcy.

One is an increase in the FDIC insurance limit of $250,000, which several senior Democratic lawmakers have called for in the wake of the SVB’s collapse.

After the 2008 financial crisis, Congress raised the FDIC limit from $100,000 to $250,000, and passed a plan where large banks contribute more to the insurance fund than smaller lenders.

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