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(Bloomberg) -- Treasury Secretary Janet Yellen said that her department is monitoring for a potential contraction in credit in the US following the collapse of Silicon Valley Bank, which sparked the danger of contagion across the banking system.
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Speaking at a Senate Finance Committee hearing Thursday, Yellen told lawmakers that she had first heard of problems with SVB just one day before it was put into Federal Deposit Insurance Corp. receivership last Friday. Noting the bank’s high reliance on uninsured deposits for funding, she said regulators must “reexamine our rules and supervision and make sure they’re appropriate.”
Regulators intervened “because of the recognition there can be contagion in situations like this and then other banks can then fall prey,” Yellen said in answering questions before the panel. The Treasury is now monitoring a wide range of indicators to gauge how lenders are reacting, she said.
“A more general problem that concerns us is the possibility that if banks are under stress, they might be reluctant to lend where they’re worried about shoring up liquidity and capital,” the Treasury chief said. “And we could see credit become more expensive and less available.”
That would morph into a “significant” downside economic risk, she said. Economists have already predicted that small and regional lenders will indeed rein in credit in the aftermath of the collapse of SVB and Signature Bank over the past week — damping growth and raising the risk of a recession.
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In her prepared remarks, Yellen said, “I can reassure the members of the committee that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them.”
For now, regulators are focused on ensuring financial stability, Yellen said. But in time supervision and regulation will need to be re-examined, she said. She noted that the stress tests conducted by US regulators are focused on capital adequacy, rather than liquidity. She added that liquidity had played an “important role” in the recent bank failures.
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Yellen’s testimony was scheduled to discuss President Joe Biden’s 2024 budget, and she faced a number of partisan monologues from members of the committee. Several Republicans blasted the administration for a fiscal outlook that features a widening deficit and unprecedented government debt burden. Democrats attacked Republicans for attempting to use the federal debt limit as leverage in budget negotiations.
The hearing comes amid tumult in global markets and worries over financial stability after the rapid-fire collapse of three regional US banks and troubles at Credit Suisse Group AG.
The Treasury is backing a new Federal Reserve facility, unveiled Sunday, to offer troubled banks liquidity in return for high-quality assets — aiming to halt any further runs on deposits.
“This week’s actions demonstrate our resolute commitment to ensure that depositors’ savings remain safe,” Yellen said in her remarks to the committee Thursday.
--With assistance from Ana Monteiro.
(Updates with new Yellen comments starting in first paragraph.)
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