Jay Powell and Janet Yellen struggle to calm nerves in the banking crisis

Top US economic policymakers appeared to speak with one voice on Wednesday when Federal Reserve Chairman Jay Powell and Treasury Secretary Janet Yellen separately reassured depositors that their money was safe.

But a few minutes later, there was a sell-off in bank stocks, reflecting confusion among investors about how far the government was willing to go to protect these depositors.

Yellen was asked by Tennessee Republican Senator Bill Haggerty if the Biden administration is considering a unilateral guarantee for all bank deposits — even those over the current $250,000 limit for federally insured savings. She replied that the US authorities would not go that far.

“I didn’t think about or discuss anything related to comprehensive insurance or guarantees,” she said.

The market sell-off after Yellen’s remarks highlighted lingering concerns about the fate of uninsured deposits at small and regional banks two weeks after the collapse of Silicon Valley and Signature Bank. Investors and depositors have been hanging on to every word of the policy makers for clues about the government’s willingness to intervene.

“What Yellen and Powell are trying to do, which is difficult, is calibrate what they say so that if it does end, they don’t commit themselves to doing a lot of things that aren’t necessary, recognizing that if it does go wrong,” said David Wessel, senior fellow in economic studies at the University of Michigan. Brookings Institution, “It’s clear we’re going to have to do more.”

The US Treasury and Federal Reserve created a tacit assumption that authorities would step in to protect Americans’ savings and prevent a broader banking crisis when they set up a liquidity facility to help prop up troubled banks on generous terms and bail out uninsured SVB depositors. and sign.

But regulators did not support an explicit guarantee for all deposits in the country, or even an increase in the maximum amount of insured deposits. Perhaps these more drastic steps will require the politically thorny process of obtaining congressional approval.

“Certainly, the way we think about deposit insurance in the wake of Dodd-Frank is that it requires congressional action. [Federal Deposit Insurance Corporation] “To provide comprehensive and comprehensive insurance for all deposits,” said Sarah Bender, a professor at George Washington University, referring to regulations passed in the aftermath of the 2008 financial crisis. For now, the Biden administration remains intent on addressing problems at individual banks on a case-by-case basis.

On Tuesday, at a meeting of the American Bankers Association, Yellen said “similar measures” to those taken with SVB and Signature “could be justified if smaller institutions suffer from deposits that pose a risk of contagion,” contributing to a rally in bank stocks. . . Then came her comments in the Senate on Wednesday, and the market sell-off.

By Thursday, this time before the House of Representatives, Yellen had amended her testimony to give an answer similar to her comments two days earlier, again calming investors.

“We used important tools to work quickly to prevent infection. And they are tools we can use again,” she said, adding, “Certainly, we will be prepared to take additional measures if necessary.”

Although critics noted that Yellen’s comments contradicted or clashed with Powell’s, most economic policy experts in Washington dismissed any suggestion that there was a divide between them regarding the response to the crisis. Powell’s remarks about the safety of deposits are generally based on confidence in the strength of the Fed’s facility, while he didn’t directly address the more specific question of collateral for uninsured accounts.

“I don’t think there’s a difference between what Paul and Whelen said substantively [but] “I think they haven’t fully articulated themselves on policy yet,” says Michael Strain, an economist at the American Enterprise Institute, a conservative think tank.

“In my opinion, they both have the same goal — to calm panic and run,” said Christina Skinner, an expert in financial regulation and central banking at the University of Pennsylvania.

However, some blamed mixed messages from Washington for fueling the market turmoil.

“The longer the uncertainty persists, the more permanent damage will be to smaller banks, and the more difficult it will be to bring back their customers,” Bill Ackman, activist investor and CEO of Pershing Square Capital, said on Twitter.

Andrew Brenner of National Securities Alliance accused Yellen of “nonsense” on the deposit issue.

“I would say this wasn’t the most shrewd communication from the Treasury Department,” Wessel added.

By Friday afternoon, after the Financial Stability Oversight Board meeting, US regulators and officials, including Yellen and Powell, declared that the banking system remained “sound and resilient” — with some relief that deposit inflows had leveled off and that the crisis was confined to a few institutions. .

A person familiar with the Biden administration’s thinking said Friday that he did not see expanding deposit insurance “as necessary” because it already had “tools” to support community banks.

“Since our administration and regulators took decisive action last weekend, we have seen deposits at regional banks across the country stabilize and, in some cases, modestly reverse outflows,” the White House said.

But if pressures in the banking sector persist or worsen, the fog surrounding whose uninsured deposits may be protected could become increasingly troubling.

“I think the bigger problem is the one that policymakers always have at a time like this: How do you try to restore confidence in the banking system without exaggerating how much you know, or saying something you’ll regret three days later when something blows up?” Wessel said. So”.