Wednesday, November 1, 2023

Yellen: US Bank Failures Not Like 2008 Crisis


Janet Yellen, the US Treasury Secretary, has reassured the public that the country’s banking system is “sound” despite recent bank failures. Speaking at the American Bankers Association, Yellen stated that the government’s intervention in the wake of the collapse of Silicon Valley Bank and Signature Bank had helped contain the fallout. The US government seized the two banks and guaranteed the money of all their depositors, including those who were uninsured. Yellen suggested that the government may continue to guarantee all deposits in cases of further bank failures. She also highlighted that Washington had created a lending initiative, the Bank Term Funding Program, to provide additional liquidity to financial institutions and help banks meet the needs of all their depositors.

US regulators closed SVB on 10 March after it experienced a bank run. Specialising in lending to technology start-ups and venture capitalists, the California-based institution had invested much of its money in US government bonds, whose value fell as interest rates rose. A second bank, New York-based Signature, also failed. Yellen and other US officials have sought to defend the government’s interventions amid concerns and public frustration around its decision to effectively bail out financial institutions that critics say were mismanaged. The administration of US President Joe Biden insists that its recent actions do not constitute a bailout.

Late last week, US banking giants pledged to deposit $30bn to prop up a struggling California-based lender, First Republic Bank, in a move welcomed by Washington. The failures of SVB and Signature Bank and tumbling banking stocks had raised fears of a broader economic collapse similar to the 2008 financial crisis. However, Yellen said on Tuesday that the two situations are not the same. She stated that the recent developments are very different than those of the global financial crisis, where many financial institutions came under stress due to their holdings of subprime assets. Yellen added that the US financial system is significantly stronger than it was 15 years ago due to post-crisis reforms that provided stronger capital standards, among other important improvements.

Two years after the 2008 meltdown, US lawmakers passed a sweeping Wall Street reform law. But some of its regulations were rolled back in 2018 with bipartisan support. Last week, Biden called on Congress to tighten regulations in order to hold the executives of failed banks accountable for “mismanagement and excessive risk-taking”, including by banning them from working in the industry. The White House said in a statement that “the president believes that if you’re responsible for the failure of one bank, you shouldn’t be able to just turn around and lead another”.

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