Yellen Warns Bank Executives of ‘Severe Consequences’ of Default

Treasury Secretary Janet Yellen testifies about the Biden administration's FY2024 federal budget proposal before the Senate Finance Committee in the Dirksen Senate Office Building on Capitol Hill in Washington on March 16, 2023. Chip Somodevilla/Getty Images

Treasury Secretary Janet Yellen met with more than two dozen CEOs and executives at a meeting convened by the Bank Policy Institute (BPI) to discuss the debt ceiling and the state of the economy and banking system.

Yellen reiterated her public position that the U.S. banking system is sound and resilient, alluding to its high capital levels and strong liquidity positions. She added that measures employed by the Biden administration and federal regulators to shield depositors from financial ruin ensured “public confidence in the banking system and mitigate financial contagion.”

The debt ceiling was also at the top of the agenda during the meeting in Washington, highlighting “the real and severe consequences of default for the banking system and the domestic and global economy.”

“She outlined how a failure to raise or suspend the debt limit would be catastrophic for the financial system, as well as American families and businesses, and underscored the Administration’s belief that the debt limit should be addressed without delay,” the Treasury Department said in a statement.

Reports stated that the attendees included JPMorgan Chase CEO Jamie Dimon, Bank of America CEO Brian Moynihan, and Citigroup CEO Jane Fraser.

JPMorgan Chase CEO Jamie Dimon in Washington on April 9, 2019. Jeenah Moon/Reuters

This comes after Senate Majority Leader Chuck Schumer (D-N.Y.) also met with some of the top banking executives in the country regarding the debt ceiling.

Schumer spoke on the Senate floor on May 18, saying in his opening remarks that he is “hopeful” Republicans and Democrats will find an agreement on the debt ceiling.

“I am hopeful that soon both sides will find an agreement that keeps default completely off the table. We made good progress this week. But the work continues,” Schumer said. “I’m also pleased that the other side has recognized the best way forward is a bipartisan piece of legislation that can secure enough votes to get through both the House and the Senate. Partisan legislation just won’t produce the result we need.”

Meanwhile, Dimon has been outspoken on the debt limit issue, warning that a default would be “potentially catastrophic” for the United States.

In the end, Dimon anticipates that a worst-case scenario will be avoided. But, at the same time, he thinks that “the closer you get to it, you will have panic,” alluding to volatility in the stock market and Treasurys.

“If it gets to that panic point, people have to react, we’ve seen that before,” the JPMorgan executive recently told Bloomberg. “It’s a really bad idea because panic becomes something that is not good. It could affect other markets around the world.”

John Higgins, the chief markets economist at Capital Economics, noted that the latest developments in the financial markets suggest that “investors are more worried about a default than they were in 2011 and 2013.”

“After all, US sovereign credit default swap (CDS) premia have risen to higher levels than on those occasions. And the CDS curve is more inverted, suggesting greater concern about a near-term default,” he wrote in a research note. “But the reality may be different.”

Markets Rally

Despite modest market jitters, Treasury yields were mostly up on cautious optimism.

The benchmark 10-year yield jumped more than 7 basis points to above 3.65 percent. The three-month bill rose two basis points to 5.281 percent, while the three-year bond climbed more than 12 basis points to 3.935 percent.

The leading benchmark indexes also finished the May 18 session higher, led by a 1.51 percent gain in the Nasdaq Composite Index.

The gains were driven by House Speaker Kevin McCarthy (R-Calif.) telling reporters that the House might vote on a debt ceiling agreement as early as next week.

But there are some concerns that McCarthy might not have the votes.

“Here’s the deal: McCarthy has nowhere near the votes for a deal and therefore cannot negotiate debt ceiling,” wrote Rep. Alexandria Ocasio-Cortez (D-N.Y.) on Twitter.

“You need 218 votes. GOP has maybe ~150. They will need anywhere from 50-100 House Dems to pass anything,” she added. “Dems have 213 votes for a clean bill & just need to pick up 5.”

But the House speaker did obtain enough support for legislation in April that lifted the debt ceiling, garnering 217 votes.

In the meantime, the clock may be ticking for the Treasury as its cash balance trends lower.

According to the Daily Treasury Statement, the Treasury General Account Opening Balance was $94.629 billion on May 17, up from $87.431 billion on the previous day.