Shares of First Republic and other regional U.S. banks rallied on Tuesday after Janet Yellen said the government was ready to provide additional support to small lenders if needed.
In an intervention aimed at bolstering confidence in the banking system after more than a week of turmoil, the US Treasury Secretary said the guarantees offered to depositors at the failed Silicon Valley Bank could be replicated at other institutions.
“The actions we took were not aimed at helping specific banks or classes of banks,” Yellen said in a speech Tuesday to the American Bankers Association, which marked its most in-depth comments yet on the banking turmoil.
“Our intervention was necessary to protect the entire US banking system,” she added. “And similar actions might be warranted if smaller institutions experience deposit runs that pose a risk of contagion.”
Shares of First Republic, which have fallen about 85% this month, rose nearly 30% to close at $15.77 a share in New York, sending U.S. lenders higher. US Bancorp, KeyCorp and Zions rose 7-9%. The KBW banking index gained 5%.
Casey Haire, U.S. banking analyst at Jefferies, said Yellen’s public remarks reassured investors. “Having the Treasury Secretary comment that he would step in if necessary is the clearest sign that regulators could still act.”
The Treasury has worked with the Federal Reserve and the Federal Deposit Insurance Corporation to provide guarantees for all deposits from the bankrupt SVB and Signature Bank, including those above the $250,000 threshold that are not covered by the government insurance. Additionally, the Fed announced a new facility to increase liquidity for troubled banks.
While Yellen defended the “decisive” and “strong” steps taken by regulators to avert a broader banking crisis in the United States, the problems plaguing smaller institutions are far from resolved. A $30 billion lifeline put in place by the chief executives of Wall Street banks – and cheered by the US government – initially failed to stop the previous sharp selloff in First Republic Bank shares.
In Europe, the turmoil following the collapse of SVB contributed to the collapse of Credit Suisse, which UBS agreed to buy in a deal that wiped out $17 billion worth of bonds.
As the SVB crisis has been compounded by the impact of rising interest rates on the bank’s bond portfolio, the issues affecting the sector are also weighing on central banks. The Fed’s open market committee is meeting on Wednesday to decide whether to go ahead with a quarter-point rate hike or forgo a hike to help stabilize the financial system.
Yellen suggested that concerns in the United States had been allayed to some extent by market developments in recent days. “The situation is stabilizing. And the US banking system remains strong,” she said. “Overall deposit outflows from regional banks have stabilized.”
“We are fully focused on our work,” she added. “And you must be assured that we will remain vigilant.”
Yellen pointed out that the current turmoil is different from that of the global financial crisis. “At the time, many financial institutions were struggling due to their holdings of subprime assets. We don’t see this situation in the banking system today,” she said. “Our financial system is also significantly stronger than it was 15 years ago. This is largely due to post-crisis reforms which provided tighter capital standards, among other important improvements.
Yellen emphasized the importance of small and medium banks to the US economy. A concern in recent days has been that the current crisis will strengthen large financial institutions at the expense of smaller ones.
“Big banks play an important role in our economy, but so do small and medium banks,” she said. “These banks are strongly committed to traditional banking services that provide vital credit and financial support to families and small businesses. They also increase competition in banking and often have specialized knowledge and expertise in the communities in which they invest.
In addition to helping individual bank depositors, U.S. officials are also considering whether they should take additional steps to restore confidence, including raising or removing the $250,000 cap on FDIC-insured deposits.
Congressional support would be needed for such a step unless Biden administration officials find a way to pass the measure through executive action. In his speech, Yellen highlighted the potential for further banking reforms to strengthen regulation in the sector.
“We are currently focusing on the current situation. But we will need to re-examine our current regulatory and supervisory regimes and determine whether they are adequate for the risks banks face today,” she said. “We all share an interest in ensuring that the United States remains the soundest and safest financial system in the world.”