Bank stocks slide as Janet Yellen downplays ‘blanket’ deposit insurance

US Treasury Secretary Janet Yellen ruled out a broad extension of deposit insurance to protect savers with balances in excess of $250,000 in the near term, comments that fueled another sell-off in stocks of smaller US banks.

At a Senate hearing on Wednesday afternoon, Yellen said there could be “reasonable discussions” about whether the current $250,000 limit on insured deposits should be removed as part of long-term system reforms.

But the Treasury Secretary said that given the current turmoil, the Biden administration is not considering a move to expand deposit insurance, which would require congressional approval, unless the Treasury Department finds a way to unilaterally implement it.

“I haven’t considered or discussed anything that has to do with blanket insurance or deposit guarantees,” Yellen said.

Her comments came shortly after Federal Reserve Chairman Jay Powell tried to reassure Americans that their deposits were “safe” as policymakers had already taken measures, including a liquidity-boosting facility set up by the central bank for smaller banks.

Yellen said uninsured deposits over $250,000 could only be protected if a failing bank was viewed as a systemic risk to the financial system, as was the case with Silicon Valley Bank and Signature Bank earlier this month. She said the decision would be made on a case-by-case basis.

Earlier this week, Yellen said in a speech to the American Bankers Association that the US government was ready to step in for individual banks if necessary. “Similar measures might be warranted if smaller institutions suffer deposit runs that pose a risk of contagion,” she said at the time.

Yellen’s comments came on another brutal day for investors in smaller US banks. Shares of such lenders were already falling on Wednesday, but the decline accelerated, according to the finance minister’s statement in the afternoon.

The KBW bank index, which tracks shares in 24 large and mid-sized banks, fell nearly 5 percent, reversing gains it made after Yellen’s comments to the Bankers Association on Tuesday.

The decline weighed on the broader S&P 500, with banks making up seven of the 10 worst performers in the benchmark index. First Republic led the declines, losing 15 percent. Comerica, M&T Bank and US Bancorp each fell more than 7 percent.

Shares of PacWest, a Beverly Hills-based bank, fell 17 percent after it said it lost 20 percent of its deposits this year and announced it would increase its access to cash using a $1.4 billion lending facility Having strengthened dollars from an investment company.

Meanwhile, First Republic said executives would not receive their 2023 bonuses — while the founder and chief executive will no longer receive a salary — as the lender tries to regain investor confidence after its shares plummeted more than 85 percent in a month have fallen.

Fitch, the rating agency, has further reduced the San Francisco-based bank to junk territory, warning: “[First Republic] is currently operating at a net loss that is unsustainable in the longer term without a balance sheet restructuring.”

Both Democratic and Republican lawmakers, as well as some banking lobbyists, executives and economists, have called on the US to raise or suspend the $250,000 limit on insured deposits to prevent further deposit flight by small and regional banks.

However, there is no clear bipartisan consensus in Congress for such a move. Many Republicans are wary of lifting the limit because it could expand the federal government’s role in the banking system and result in higher fees for banks — which fund deposit insurance — which could be passed on to consumers.

Meanwhile, some Democrats have concerns about moral hazard and fear it could reward risky behavior by banks.

Despite Yellen’s comments, the debate over extending bank deposit guarantees in the US is likely to continue, especially if the current turmoil leads to further deposit flight.