WASHINGTON — Treasury Secretary Janet Yellen Tuesday renewed her calls for Congress to immediately raise the debt ceiling while also doubling down on regulators’ robust regulatory interventions in the banking sector in March.
Speaking at an Independent Community Bankers of America conference, Yellen reiterated her concerns that Congress is moving too slowly to avert a financial catastrophe by breaching the federal debt ceiling, which she said could happen as early as June 1. That catastrophe has already begun, she said, in the form of markets shying away from near-term Treasury securities.
“We are already seeing the impacts of brinkmanship: Investors have become more reluctant to hold government debt that matures in early June,” she said. “The impasse has already increased the debt burden to American taxpayers — as the leaders of the Treasury Borrowing Advisory Committee said last week.”
Yellen stressed that if congressional negotiators fail to reach a deal before the impending debt limit deadline of early June, the Treasury may not be able to satisfy all of the government’s obligations, triggering economic and financial catastrophe, threatening the U.S. dollar’s credibility and squandering the hard-earned progress the economy has made in the wake of the COVID pandemic.
“In 2011, we resolved the debt ceiling crisis right before the government had to stop making payments. But that eleventh-hour brinkmanship led to the first-ever downgrade of our credit rating in history,” Yellen said. “Consumer confidence fell by over 20%. The S&P 500 plummeted by about 17%. Spreads for mortgages and auto loans widened. The U.S. economy hangs in the balance. The livelihoods of millions of Americans do too. There is no time to waste.”
Yellen also defended regulators’ invocation of a systemic risk exception with the failures of Silicon Valley Bank and Signature Bank in March, and said regulators would take the same action for smaller banks if their failures pose a risk of contagion to the broader financial system. She also said community banks played a vital role in strengthening pandemic recovery efforts and remain a cornerstone of the national financial landscape, and noted that the risk of bank runs that sparked the banking crisis in March have since stabilized.
“The situation has stabilized since then. Aggregate deposit outflows have steadied, and the Fed’s Bank Term Funding Program and discount window are working as intended,” Yellen said. “Like our community banks, the U.S. banking system remains sound. There is strong liquidity and capital in the system. The decisive actions that we took in March to protect depositors and provide additional liquidity to the system mitigated the very serious risk of broader financial contagion.”
Addressing smaller bankers — who have criticized regulators for giving larger banks preferential treatment — she argued March’s regulatory actions were purely to stave off contagion, did not cost taxpayers nor did actions benefit the midsize regional banks’ management or stakeholders. She also pushed back on the assertion by some smaller banks that regulators would only take drastic measures to help larger banks, even though, she ceded, such potential interventions would still require a bank with a footprint prominent enough to pose a systemic risk.
“To be sure, there have been some aftershocks of the March developments, including the resolution of First Republic [Bank]. But I do not believe that these developments are a sign of any shift in the fundamental health of the banking system,” Yellen said. “We remain vigilant and we continue to closely monitor conditions. As I’ve said, we have a set of effective tools at our disposal. We are prepared to take further actions if needed — including if smaller institutions suffer deposit runs that pose the risk of contagion.”