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Yellen Says U.S. Ready to Protect Smaller Banks if Necessary

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WASHINGTON — Treasury Secretary Janet L. Yellen expressed confidence in the nation’s banks on Tuesday but said that she is prepared to take additional actions to safeguard smaller financial institutions as the Biden administration and federal regulators work to contain fallout from fears over the stability of the banking system.

Ms. Yellen, seeking to calm nerves as the U.S. financial system faces its worst turmoil in more than a decade, said that the steps the administration and federal regulators have taken so far have helped restore confidence but that policymakers remain focused on making sure that the broader banking system remains secure.

“Our intervention was necessary to protect the broader U.S. banking system,” Ms. Yellen said in prepared remarks to be delivered to the Washington meeting of the American Bankers Association, the industry’s leading lobbying group. “And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”

She added: “The situation is stabilizing. And the U.S. banking system remains sound.”

The comments come as government officials contemplate additional options to stem the flows of deposits out of small and medium-size banks, and as concerns grow that more will need to be done.

Ms. Yellen said recent federal actions after the failure of Silicon Valley Bank and Signature Bank were intended to show that the Biden administration was dedicated to protecting the integrity of the system and ensuring that deposits were secure.

In the past 10 days, federal regulators have used an emergency measure to guarantee the deposits of Silicon Valley Bank and Signature Bank, initiated a new Federal Reserve program to make sure other banks could secure funds to meet the needs of their depositors and coordinated with 11 big banks that deposited $30 billion into First Republic, a wobbly regional bank.

“The situation demanded a swift response,” Ms. Yellen is set to say. “In the days that followed, 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.”

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Despite those efforts, the Fed’s campaign to raise interest rates to tame inflation has exposed weaknesses in the balance sheets of regional banks, rattling investors and raising fears that deposits are not safe.

Ms. Yellen said that the current stress in the banking system is different from what happened during the 2008 financial crisis, when risky bets by some of the nation’s largest financial institutions plunged the economy into a deep recession. She said that the financial system is far stronger than it was 15 years ago but also called for an examination of how the recent bank failures occurred.

“In the coming weeks, it will be vital for us to get a full accounting of exactly what happened in these bank failures,” Ms. Yellen said. “We will need to re-examine our current regulatory and supervisory regimes and consider whether they are appropriate for the risks that banks face today.”

The Federal Reserve, which is the primary regulator for banks, is undertaking a review of what happened with Silicon Valley Bank as well as looking more broadly at supervision and regulation.

The uncertainty about regional banks has also led to concerns that the industry will further consolidate among big banks.

Ms. Yellen made clear on Tuesday that banks of all sizes are important, highlighting how smaller banks have close ties to communities and bring competition to the system.

“Large banks play an important role in our economy, but so do small and midsized banks,” Ms. Yellen plans to say. “These banks are heavily engaged in traditional banking services that provide vital credit and financial support to families and small businesses.”

The Treasury secretary added that the fortunes of the nation’s banking system and its economy are inextricably tied.

“You should rest assured that we will remain vigilant,” Ms. Yellen plans to say.

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