US banking system is ‘solid’, says Yellen

The banking system of USA is strong despite the recent turmoil caused by the failure of three banks, including the iconic start-up financier Silicon Valley Bank (SVB) and the SignatureBankthe Treasury secretary said Thursday, Janet Yellen.

Three consecutive bankruptcies in the banking sector in less than a week mark the worst bankruptcies since the 2008 financial crisis and prompted US authorities to clamp down very quickly to protect deposits.

The authorities’ assessment was that there was a “serious risk of contagion and massive withdrawals”Among the clients who had funds in excess of what was guaranteed by the federal apparatus in those two banks, explained Joe Biden’s Economy Minister before a Senate commission, after the bankruptcy of the two entities and their takeover by the competent state agencies.

In the midst of these fears, the Federal Reserve (Fed, central bank), also announced a mechanism to grant funds to banks if they needed them to respond to the demand of their clients.

“This week’s actions demonstrate our commitment to ensuring our financial system remains strong and depositors’ savings remain safe”Yellen told the Senate Finance Committee.

“I can assure the committee members that our banking system is sound”he added at this hearing, intended in principle for Biden’s federal budget proposal.

Contagion fears

Contagion fears spread to Europe. In Switzerland, Credit Suisse entered the storm on Wednesday and collapsed 24.24% on the stock market.

This Thursday its action recovered after the entity announced in the early hours of Thursday, European time, that it will borrow up to 50,000 million Swiss francs (53,700 million dollars) from the central bank.

BLSa historical lender to start-ups or emerging companies since the 1980s, was exposed to the interest rate hikes decided by the Federal Reserve to contain inflation, and its clients, who saw credit become more expensive, began to withdraw deposits .

The run shook this bank, the sixteenth by volume of assets, which was unable to raise funds to respond. Faced with its insolvency, regulators took control of the bankrupt entity on Friday.

On Sunday, the Treasury, the Fed and the Federal Deposit Insurance Corporation (FDIC) guaranteed the recovery of all deposits, while the Fed’s new mechanism for banks to access money if they need it sought to reassure the market and avoid contagion to other entities.

This type of intervention requires the decision of the FDIC board, a supermajority of the Fed board, and the Treasury secretary herself in consultation with the president.

Consideration to adopt exceptional measures of this type requires “determine that failure to protect uninsured deposits (by the FDIC, which covers up to $250,000, ndlr) would create systemic risk with significant economic and financial consequences”explained the official.

Due to interest rate increases, some SBV assets, such as Treasuries, had lost market value. The higher the rate, the lower the value of the bond.

Source: AFP