Treasury Secretary Prepared to Take “Additional Action” to Protect Bank Deposits

Treasury Secretary Janet Yellen suggested that her department might be willing to further backstop bank deposits if needed, only one day after seemingly ruling out the possibility.

Her comments were followed by brief fluctuations in bank stocks, which then continued their downward daily trend.

Are Deposits Backstopped or Not?

In her prepared testimony before the House Appropriations Subcommittee on Wednesday, Yellen reiterated comments from the day prior explaining that the government’s recent actions were to ensure the safety of American deposits. 

However, she removed a key line from Wednesday’s testimony, asserting “the U.S. banking system is safe and sound” – now inserting a statement that the Treasury “would be prepared to take additional actions if warranted.”

“As I have said, we have used important tools to act quickly to prevent contagion,” said Yellen, “and they are tools we could use again. The strong actions we have taken ensure that Americans’ deposits are safe.”

The comments seem to contradict Yellen’s Wednesday statements before another Senate subcommittee stating that the Treasury was not considering a “blanket” guarantee on bank deposits in the short term, without congressional approval, causing bank stocks to tumble afterward. 

Those earlier comments also contradict her claim from Tuesday that the Treasury would be willing to safeguard deposits at smaller U.S. banks if warranted. Her repeated flip-flop on the issue has voices within the crypto community calling her bluff, suggesting the government is either disingenuous or indecisive regarding a potential banking crisis. 

A lot of the actions by the Fed and Treasury seem to be kind of “winging it” more so than normal lately.

Like, just feel it out, pencil stuff in, see what breaks, respond if needed, repeat. https://t.co/qTKRruYII3

— Lyn Alden (@LynAldenContact) March 23, 2023

Backstopping Everything

After the Treasury’s objection to a system-wide deposit guarantee on Wednesday, billionaire Bill Ackman suggested that deposit outflows would likely accelerate fast. This outflow, he said, would be hastened by the unattractiveness of bank deposits, due to the Fed raising its policy rate to 5% that same day.  

“A temporary systemwide deposit guarantee is needed to stop the bleeding,” he added. “The longer the uncertainty continues, the more permanent the damage is to the smaller banks, and the more difficult it will be to bring their customers back.”

Yellen has previously claimed that the Fed would only be prepared to backstop deposits at banks deemed to present “systemic risk” to the financial system. Critics have argued that such a promise would ensure there is no incentive for the bank customer to keep their deposits with smaller banks, creating a two-tiered system. 

Stock in First Republic Bank fell another 6% on Thursday. Meanwhile, Deutsche Bank stock fell 3% as credit-default swaps insuring against the bank’s insolvency surged to highs not seen since early 2020.