Community bank depositors could be protected if run occurs, poses risk – Yellen

Treasury Secretary Janet Yellen said the government is open to protecting all depositors at smaller banks in the event of a run that poses contagion risk.

Following the failures of Silicon Valley Bank and Signature Bank, both of which had large amounts of uninsured deposits, Yellen approved plans guaranteeing all deposits, both insured and uninsured, for customers of both banks. While speaking at an industry conference, Yellen said the government could do the same for community banks, if needed.

"Our intervention was necessary to protect the US banking system," Yellen said. "Similar actions could be taken if smaller institutions suffer deposit runs that pose the risk of contagion."

However, aggregate deposit outflows have stabilized following a number of actions taken by bank regulators, Yellen said.

Just last week, when asked if uninsured deposits at community banks would be guaranteed in the event of failure like Silicon Valley and Signature, Yellen said they would only be covered when "failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences."

On a broader scale, Yellen said financial regulators are considering modifications to supervision and regulation of the industry following the collapse of Silicon Valley and Signature. However, "I don't want to speculate what those changes might be," Yellen said.

Yellen said bank regulators are still scrutinizing what happened at the two banks, and more details are needed.

The Treasury secretary also noted that government steps to address the ongoing liquidity crunch are working "as intended."

According to data released by the Fed through March 15, US banks have borrowed $11.94 billion from the newly created Bank Term Funding Program since the initiative was announced March 12. Funding stress was also apparent in a $148.27 billion jump in discount window borrowing from the week prior to $152.85 billion.

Yellen stressed that the current financial situation is not similar to the 2008 global banking crisis, and that the US banking system remains sound. The Treasury official also emphasized that there is a critical need to raise the debt ceiling.