US Treasury Secretary Janet Yellen has ruled out a broad expansion of deposit insurance to protect savers with balances above $250,000 in the near term. Yellen said there could be “reasoned discussions” on whether the current $250,000 limit for insured deposits should be lifted as part of long-term systemic reform. However, the Biden administration is not considering a move to broaden deposit insurance. Comments from Yellen fuelled another sell-off in shares of smaller US banks.
Yellen said uninsured deposits above $250,000 could be protected only if a failed bank was deemed to pose a systemic risk to the financial system. She added that determination would only be made on a case-by-case basis. Shares of smaller US banks were already falling on Wednesday, but the declines accelerated after the Treasury secretary’s testimony in the afternoon. The KBW Bank index, which tracks shares in 24 large and midsized banks, dropped almost 5 per cent, reversing all the gains it made earlier this week.
The decline weighed on the broader S&P 500, with banks contributing seven of the 10 worst performers on the benchmark index. Majority of the 24 large and midsized banks showed decline in shares. Yellen’s comments caused a sell-off in banking shares, particularly small lenders. Many politicians, bank lobbyists, executives, and economists have called for the US to increase or suspend the $250,000 limit for insured deposits in order to prevent further deposit flight from small and regional banks. However, there is no clear bipartisan consensus in Congress for such a move.
The US banking system is expecting the debate over expanding bank deposit guarantees to continue. This is particularly so if there is further deposit flight due to the ongoing turmoil. Yellen’s comments came on another brutal day for investors in smaller US banks. Many smaller US Banks are at a high risk of failing because they are not well-capitalized enough to absorb bad loans, making them vulnerable to sudden downturns.