Janet Yellen Calls Emergency Meeting of Financial Stability Council Amid Bank Turmoil

Treasury Secretary Janet Yellen at a House Ways and Means Committee hearing on Capitol Hill in Washington, on March 10, 2023. Drew Angerer/Getty Images

Treasury Secretary Janet Yellen called an emergency meeting with top U.S. financial regulators.

Yellen will chair the closed-door Financial Stability Oversight Council (FSOC) meeting on Friday, the Treasury Department said in a statement. The Treasury did not provide any additional details regarding the closed meeting.

The FSOC meets regularly to discuss national financial stability and regulation issues. The group consists of the heads of the Federal Reserve, the Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corporation (FDIC), and regulatory bodies. While it only maintains a little legal authority, members use the FOSC for coordinating purposes.

Appearing before the Senate Appropriations Financial Services and General Government Subcommittee hearing on March 22, Yellen told lawmakers that the FSOC was preparing a revised guidance report that would revive the group’s ability to designate non-bank financial institutions as systemically important. This would foster stronger regulation.

This comes two weeks since Silicon Valley Bank and Signature Bank failed, sparking widespread fears surrounding the strength and stability of the U.S. and global banking system.

Banking crisis fears were exacerbated on Friday as Deutsche Bank shares tanked as much as 16 percent. The cost of insuring against its default surged, fueled by broader market concerns regarding the stability of the European banking industry. But while market analysts have dismissed these circumstances surrounding one of the largest banks in Europe, shares have tumbled for three consecutive sessions and wiped out a fifth of its  market value.

“Deutsche Bank has modernized and organized the way it works. It’s a very profitable bank. There is no reason to be concerned,” said German chancellor Olaf Scholz after a summit of European Union Leaders.

Is Blanket Insurance Coming?

Meanwhile, Secretary Yellen told Senate lawmakers this week that she has not considered or talked about “blanket insurance” or guaranteed deposits.

But while some critics say the administration is picking winners and losers, Yellen asserted that regulators would respond if a bank failure “is deemed to create systemic risk” and triggers “the risk of a contagious bank run.” This would apply to large, mid-size, small, and community banks, she noted.

“The failure of a small bank, of a community bank, could likewise trigger a run on other banks,” Yellen added.

Prominent market experts have slammed Yellen for rejecting full deposit insurance.

Bill Ackman, a hedge fund billionaire, wrote in a tweet on Wednesday that the U.S. economy might be heading for a “train wreck” without “a temporary systemwide deposit guarantee” to “stop the bleeding.”

Bill Ackman, CEO of Pershing Square Capital, speaks at the Wall Street Journal Digital Conference in Laguna Beach, Calif., on Oct. 17, 2017. Mike Blake/Reuters

“We have gone from implicit support for depositors to @SecYellen explicit statement today that no guarantee is being considered with rates now being raised to 5 percent,” the Pershing Square Capital Management founder said. “Five percent is a threshold that makes bank deposits that much less attractive. I would be surprised if deposit outflows don’t accelerate effective immediately.”

If the uncertainty is prolonged, “the more permanent the damage is to the smaller banks,” Ackman said.

Fed chair Jerome Powell told reporters during a post-Federal Open Market Committee (FOMC) press conference on Wednesday that the central bank’s swift actions “demonstrate that all depositor savings in the banking system are safe.”

But he sent mixed signals on whether the Federal Reserve is willing to support all uninsured deposits.

“What I’m saying is you’ve seen that we have the tools to protect depositors when there is a threat of serious harm to the economy or to the financial system, and we’re prepared to use those tools. I think depositors should assume that their deposits are safe,” Powell said (pdf).

Congress will soon convene hearings with top financial regulators.

Fed vice chair of supervision Michael Barr, Treasury under secretary for domestic finance Nellie Lang, and FDIC chair Martin Gruenberg will testify in front of the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday.

“The American public deserves answers,” said Banking Committee chair Sherrod Brown (D-Ohio) in a statement. “We need to begin these hearings to understand these bank failures and next steps to make sure this never happens again.”

“As policymakers, Congress needs to understand how FRB staff and FRBSF examiners seemingly missed numerous red flags and failed to use their supervisory and enforcement tools to correct the firm’s numerous financial and management deficiencies,” the House committee lawmakers wrote in a letter (pdf) to the Fed, referring to the Federal Reserve Board and the Federal Reserve Bank of San Francisco.

Despite the chaos in recent weeks, Yellen believes that “we have a very strong and resilient banking system.”