Treasury Secretary Yellen testifies 'banking system is sound'

Treasury Secretary Janet Yellen told Congress on Thursday the U.S. "banking system is sound" after two bank failures stirred economic fears.

Yellen, who testified before the Senate Finance Committee about President Joe Biden's proposed budget, began her remarks by addressing the abrupt collapse of Silicon Valley Bank in California and Signature Bank in New York.

"I can reassure the members of the committee that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them," she said. "This week's actions demonstrate our resolute commitment to ensure that depositors' savings remain safe."

Yellen faced a grilling from lawmakers on the government's response and whether regulators missed warning signs that Silicon Valley Bank, the country's 16th largest bank, was in jeopardy. Investigations are underway at the Department of Justice and the Securities and Exchange Commission of Silicon Valley Bank's demise.

"Nerves are certainly frayed at this moment," committee chair Sen. Ron Wyden, D-Ore., said as the hearing kicked off.

Yellen defended the "decisive and forceful actions to strengthen public confidence in our banking system" in the wake of the failures. That included guaranteeing the protection of all Silicon Valley Bank and Signature Bank deposits.

Democrats generally lauded the move as necessary to protect entire financial system, though some Republicans have slammed it as a prioritization of the rich.

"I am concerned about the precedent of guaranteeing all deposits and the market expectation moving forward," Sen. Mike Crapo, R-Idaho, said in his opening remarks.

Yellen repeatedly said Thursday the action was taken because officials felt there was significant risk other potentially catastrophic bank runs could be triggered.

"I see this as a step toward stemming contagion," she said.

When pressed by Sen. James Lankford, R-Okla., about whether deposit backstops will apply across the industry to smaller community banks, Yellen said no.

“A bank only gets that treatment if a majority of the FDIC board, a supermajority of the Fed board, and I in consultation with the president, determine that the failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences," she said.

The treasury secretary attributed Silicon Valley Bank's downfall to a massive run on uninsured deposits that led to liquidity problems, and called for more analysis and a reexamination of regulatory rules.

Here are other highlights from the hearing.

'History's first internet-driven run'

Sen. Mark Warner, D-Va., homed in on the role social media may have played in Silicon Valley Bank's downfall as customers withdrew $42 billion in just a single day as prominent venture capitalists and others sounded alarms on Twitter and other apps.

"I think this will go down as history's first internet-driven run," Warner said, describing the online panic as akin to "crying fire in a crowded theater."

Yellen responded that no matter how strong a bank's capital or liquidity supervision is, "if a bank has an overwhelming run that's spurred by social media or whatever, so that it's seeing deposits flee at that pace, a bank can be put in danger of failing."

Lawmakers allege regulators were 'asleep at the wheel'

Democratic and Republican members blamed regulators for appearing to miss warning signs such as Silicon Valley Bank's reliance on uninsured deposits or its many investments in long-term government bonds.

Sen. John Cornyn, R-Texas, and Sen. Tim Scott, R-S.C., suggested regulators were "asleep at the wheel."

Sen. Michael Bennet, D-Colo., said the way Silicon Valley was operating "was not prudentially sound and I hope that the regulator would be the backstop."

Yellen called for a reexamination of regulations to address what went wrong.

"Well, I think we certainly need to analyze carefully what happened that triggered these bank failures and reexamine our rules and supervision and make sure that they're appropriate to address the risk banks face," the secretary said.

Warren places blame on Trump-era rollbacks

Sen. Elizabeth Warren, D-Mass., said the demise of Silicon Valley Bank was a "direct result" of policymakers' decisions beginning with the 2018 rollbacks of the Dodd-Frank Act.

The changes, implemented under former President Donald Trump, lifted the asset threshold for banks required to undergo stress tests to expose a bank's vulnerabilities in times of economic turmoil.

Debate has raged this week over whether such rollbacks contributed to the second-largest bank failure in U.S. history.

Yellen called stress tests one of the "most important and consequential improvements" in supervision since the 2008 financial crisis, but noted they typically don't focus on liquidity -- which was the major issue for Silicon Valley Bank.

"Let's not just do stress tests. It is the whole package: enhanced liquidity requirements that insured banks have enough cash on hand to meet their obligations, particularly in times of stress; capital requirements that better position thanks to avoid losses; regu;lar resolution plans to help guide regulators safely through winding down failed banks -- all of these were weakened in 2018," Warren said.

"I have questions for a lot of the banking regulators but Congress handed [Federal Reserve] Chair Powell the flamethrower that he aimed at the banking rules," Warren added.