Treasury Secretary Yellen assured Senate lawmakers Wednesday the U.S. banking system is "sound" despite three bank failures over the past week and the industry-wide capital injection into First Republic (FRC) announced Thursday that potentially avoided a fourth.
"We wanted to make sure that depositors, that the banks they entrust their money to, or salaries they pay workers to, that these banks are safe," Yellen said. "In the sense that the chances of contagion that other banks might be regarded as unsound and suffer runs seemed...extremely high and the consequences would be very serious."
"And that's an important reason why we stepped in to intervene, because we do believe the banking system in the U.S. is sound, and reliant, and that the problems at Silicon Valley Bank didn't undermine confidence in the soundness of banks around the country."
Late last Sunday night, the Treasury Department, along with the FDIC and Federal Reserve, announced it would backstop all deposits at Silicon Valley Bank, as well as seize Signature Bank, as cracks in the financial system rocked markets.
On Thursday, Democratic Senator Mark Warner (D-VA) said he thought Silicon Valley Bank's failure would go down in history as the first internet-driven bank run, asking Yellen about the role social media played in the bank's failure.
"No matter how strong capital and liquidity supervision are, if a bank has an overwhelming run that's spurred by social media, or whatever, so that it's seeing deposits flee at that pace, the bank can be put in danger of failing," said Yellen.
Yellen noted Silicon Valley bank had a very high ratio of uninsured depositors and that banks with insured depositors usually don't encounter runs.
Yellen said policymakers need to re-examine rules to ensure they address the risks the banks faced.
When pressed by Senator Elizabeth Warren (D-Mass.) to strengthen capital rules rolled back in 2018, Yellen noted that the Dodd-Frank supervisory stress tests focus on capital requirements not liquidity, which played a key role in the events of last week.
Yellen said regulators need to examine the liquidity requirements needed for a bank with such heavy reliance on uninsured deposits that are runnable.
Warren also sent a letter to the CEO of Signature Bank on Thursday that sought answers to what the Senator called the bank's "disastrous" collapse.
'Asleep at the wheel'
While Democrats pointed fingers at Republicans for rolling back capital requirements, Republicans blamed regulators.
"It appears that the San Francisco Fed was asleep at the wheel," said Senator Tim Scott (R-SC).
"They failed to meet their basic, not enhanced but basic, supervisory responsibilities, and therefore missed their opportunity to use enhanced supervisory tools if necessary. The failure to supervise is inexcusable and I plan to hold the regulators accountable."
Scott, like other Republicans, blamed what they deemed profligate spending by the Biden administration leading to inflation and higher interest rates. A surge in deposits at Silicon Valley Bank and a rise in interest rates that hammered the bank's Treasury holdings ultimately doomed the firm.
"Secretary Yellen, will this administration acknowledge that their reckless taxes spending contributed to the challenges that we're facing today with SVB look, inflation is too high and it is the president's top priority to bring it down?" Scott asked.
Yellen said she's monitoring stress in the banking system to make sure problems at Silicon Valley Bank and Signature don't spread to other institutions.