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Yellen made a point of contrasting the recent bank failures with the wider crisis that threatened many large institutions and credit markets in 2008. Image Credit: AP

Washington: Treasury Secretary Janet Yellen said on Tuesday the US government could repeat the drastic actions it took recently to protect bank depositors if smaller lenders are threatened.

“Our intervention was necessary to protect the broader US banking system, and similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” Yellen said in prepared remarks to an American Bankers Association conference in Washington.

US authorities took extraordinary steps this month to bolster confidence in the banking system following the collapses of Silicon Valley Bank and Signature Bank. Regulators guaranteed insured and uninsured deposits at the two institutions. The Federal Reserve also launched a new backstop for lenders and altered rules at its emergency lending facility to help them meet deposit withdrawals.

The moves were designed to stem the flow of customers taking refuge in banks seen as too big to fail, and by Friday Treasury officials were declaring that deposit flows at small and mid-sized banks had begun to normalize - a point Yellen repeated Tuesday.

“The Fed facility and discount-window lending are working as intended to provide liquidity to the banking system,” Yellen said. “Aggregate deposit outflows from regional banks have stabilized.”

Expand federal deposit insurance

Still, US officials have begun studying whether they can temporarily expand federal deposit insurance to cover all deposits. A coalition of mid-sized banks has argued that step is necessary to head off a potential crisis.

The Treasury chief didn’t address that issue in her prepared remarks. Nor did she give away her thoughts on what specific regulatory response might be necessary to prevent a re-run of the incidents.

“We are currently focused on the situation at hand,” she said. “But we will need to reexamine our current regulatory and supervisory regimes and consider whether they are appropriate for the risks that banks face today.”

Yellen’s comments come on the heels of two weeks of tumult in global markets and heightened worries over financial stability after the rapid-fire collapse of the US banks and a historic deal over the weekend that saw UBS Group AG agree to buy its troubled Swiss rival Credit Suisse Group AG.

In the US, First Republic Bank continues its battle to restore confidence after a plunge in its share price. JPMorgan Chase & Co. CEO Jamie Dimon has led plans to have a group of big banks convert some or all of the $30 billion they deposited last week with First Republic into a capital infusion, according to people familiar with the matter.

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On Tuesday, Yellen defended the recent government measures as a swift and necessary response.

“The federal government delivered just that: decisive and forceful actions to strengthen public confidence in the US banking system and protect the American economy,” she said.

The steps, she said, “reduced the risk of further bank failures that would have imposed losses on the Deposit Insurance Fund.”

Yellen made a point of contrasting the recent bank failures with the wider crisis that threatened many large institutions and credit markets in 2008.

“Recent developments are very different than those of the global financial crisis,” she said. “Back then, many financial institutions came under stress due to their holdings of subprime assets. We do not see that situation in the banking system today.”

She added that the US financial system was much stronger than in 2008 due in part to post-crisis reforms that enforced higher capital requirements for US lenders.

Yellen also said the government hoped to preserve the role of small and mid-sized lenders within the larger financial system.

“Large banks play an important role in our economy, but so do small- and mid-sized banks,” she said. “Treasury is committed to ensuring the ongoing health and competitiveness of our vibrant community and regional banking institutions.”