Yellen says US will intervene to protect smaller banks if necessary

Treasury Secretary Janet Yellen will say Tuesday that the government could repeat the drastic actions it took recently to protect bank depositors if smaller banks are threatened.

“Our intervention was necessary to protect the broader U.S. banking system, and similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” Yellen will say, according to excerpts from remarks she’s scheduled to deliver at a conference of the American Bankers Association in Washington on Tuesday. 

U.S. authorities took extraordinary steps earlier in March to bolster confidence following the failure of Silicon Valley Bank and Signature Bank. Regulators guaranteed insured and uninsured deposits at the two institutions, and the Federal Reserve launched a new backstop for lenders to help them meet deposit withdrawals. 

The moves were designed to stem the flow of customers taking refuge in banks seen as too big to fail, and by Friday Treasury officials were declaring that deposits at small and midsize banks had begun to stabilize.

Still, officials have begun studying whether they can temporarily expand federal deposit insurance to cover all deposits. A coalition of midsize banks has argued that step is necessary to head off a potential crisis. 

The Treasury chief didn’t address that issue in the excerpts released by the Treasury Department.

Yellen’s comments come on the heels of two weeks of tumult in global markets and heightened worries over financial stability after the rapid-fire collapse of the U.S. banks and a historic deal over the weekend that saw UBS Group agree to buy its troubled Swiss rival Credit Suisse.

Actions by U.S. authorities to stem the fallout from the bank failures were followed by an agreement by the nation’s biggest banks last week to deposit $30 billion with First Republic Bank, another teetering midsize lender. The move marked an effort to restore confidence among depositors fleeing from regional banks.

Despite the gesture, First Republic continued to struggle Monday, with its shares falling to new lows. 

According to people familiar with the matter, JPMorgan Chase Chief Executive Jamie Dimon was leading plans to have banks convert some or all of the $30 billion they deposited last week with First Republic into a capital infusion.

Yellen, in the prepared remarks to the American Bankers Association, plans to defend the recent government measures as a swift and necessary response.

“The federal government delivered just that: decisive and forceful actions to strengthen public confidence in the U.S. banking system and protect the American economy,” she’ll say.

The steps, she will add, “reduced the risk of further bank failures that would have imposed losses on the Deposit Insurance Fund.”

Yellen also made a point of saying the government hoped to preserve the role of small and midsize lenders within the larger financial system. 

“Large banks play an important role in our economy, but so do small- and mid-sized banks,” she said. “Treasury is committed to ensuring the ongoing health and competitiveness of our vibrant community and regional banking institutions.”