Yellen Walks Back Implicit Support For Large Bank Account Holders, Prompts Investor Unease

Treasury Secretary Janet Yellen prompted unease among investors after she appeared to walk back comments indicating that financial authorities would guarantee large bank deposits.

The recent collapse of Silicon Valley Bank, where the vast majority of accounts exceeded the $250,000 threshold guaranteed by the Federal Deposit Insurance Corporation, prompted the government-backed company to secure all accounts in order to prevent additional bank runs. Some investors have called for deposit insurance for all account holders across the financial system with balances above $250,000 until the crisis subsides.

Yellen vowed in remarks to the American Bankers Association on Tuesday that interventions similar to the one that protected Silicon Valley Bank account holders “could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” a comment that market actors interpreted as an implicit guarantee of all deposits. The senior Biden administration economist told the Senate Appropriations Committee on Wednesday, however, that she has “not considered or discussed anything” related to “blanket insurance or guarantees of all deposits.”

Markets slid on Wednesday afternoon as a result of the comments; officials at the Federal Reserve also announced an expected quarter-point target interest rate hike on Wednesday.

Pershing Square Capital Management CEO Bill Ackman had said that the earlier comments from Yellen “definitely help and hopefully mitigate the need for a temporary deposit guarantee.” He later added that the statement declaring that “systemwide deposit guarantees were not being considered” had the opposite effect.

“A temporary systemwide deposit guarantee is needed to stop the bleeding,” he contended. “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.”

Ackman noted that the rise in target interest rates to 5% renders bank deposits less attractive to savers and will prompt them to lend their money so they can benefit from the higher returns. “I would be surprised if deposit outflows don’t accelerate effective immediately,” he remarked.

Silicon Valley Bank fulfilled withdrawals by selling a long-term bond portfolio that had declined substantially in value amid Federal Reserve actions to hike interest rates. Assets in the banking system are now $2 trillion lower than their book value as a result of the rollback in monetary stimulus, which had been maintained to stimulate the economy during the lockdown-induced recession, according to a study from analysts at the National Bureau of Economic Research.

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Grit Capital CEO Genevieve Roch-Decter also noted that banks increasing their exposure to the commercial real estate sector in recent years constitutes a “timebomb sitting on bank balance sheets” since projects in the industry have been harmed by remote work arrangements. “Silicon Valley Bank’s collapse was triggered by a $1.8 billion loss from its bond portfolio,” she said. “The losses from commercial real estate loans that go into default could be much, much higher.”

Confidence in the financial system has been severely impacted by the recent volatility. Only 10% of the population has a “great deal” of confidence in the individuals who lead banks, according to a poll from the Associated Press and the National Opinion Research Center released on Wednesday, while 30% have “hardly any” confidence and 57% have “only some” confidence. The survey, which was conducted in the days after Silicon Valley Bank collapsed, showed a decline from the 22% who had a “great deal” of confidence three years ago.