Treasury Secretary Yellen says bank runs could be prevented with more government action

In case the banking situation deteriorates, Treasury Secretary Janet Yellen stated on Tuesday that the government is prepared to offer more deposit guarantees.

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The former Federal Reserve chair said in remarks that were written for a speech to the American Bankers Association that officials believed they had taken the necessary steps to address the sector's liquidity issues but would take further steps if necessary.

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"The actions we took weren't intended to help any one bank or group of banks in particular. Our involvement was required to safeguard the larger U.S. banking system, according to Yellen. And such actions would be necessary if smaller institutions experienced deposit runs that ran the risk of spreading.”

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The remarks follow a number of bank collapses, most notably Silicon Valley Bank and Signature Bank. Customers were concerned that liquidity issues brought on by duration risk with the banks' assets might prevent other institutions from being able to meet deposit requirements.

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Regulators responded by announcing that they would guarantee all deposits, exceeding the prior cap of $250,000 for the two banks. According to Yellen's remarks, the government is ready to provide the same assistance to other institutions that require it.

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Bloomberg reported on Monday that regulators are looking at a strategy to guarantee all deposits. Offering a tiered pricing structure where depositors would have to pay extra to guarantee deposits over $250,000 has been one proposal that has been proposed.

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The Treasury, Fed, and Federal Deposit Insurance Corp. initiated a two-pronged approach after the SVB and Signature disasters that allowed banks to meet their short-term borrowing requirements. The Bank Term Financing Program offered one-year loans against safe securities at their full face value, whereas the Fed Discount Window was enlarged.

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Collectively, the measures aided in ensuring that banks would have access to funding when depositor withdrawals increased as public trust in smaller banks declined.

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"Things are beginning to settle down. And the American banking system is still stable," added Yellen. "Lending through the discount window and the Fed facility is supplying the banking sector with liquidity in the manner planned. The overall flow of deposits out of regional banks has remained steady."

The SPDR Regional Banking ETF, an exchange-traded fund that tracks small bank equities, increased 3.3% in premarket trading. In the most recent month, the fund fell 31%.

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First Republic, one of the most challenged banks on the market, increased 14.7% in premarket trading after Janet Yellen's speech. This was after the announcement that Jamie Dimon, CEO of JPMorgan Chase, is advising First Republic on options for survival, including a potential capital raising or sale.

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For the past few weeks, all bank shares have been volatile.

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Despite the fact that the industry is thought to be well-capitalized, issues have arisen because of the type of capital. Many banks have accumulated large amounts of long-term securities such as municipal bonds, mortgage-backed securities, and Treasury bonds. As a matter of fact, First Republic has a substantial portion of munis on its balance sheet.

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The face value of the bonds has decreased as a result of the recent rise in interest rates. In the instance of SVB, the bank was compelled to sell a significant amount of its holdings at a loss in order to satisfy depositor requests. This triggered a second crisis of confidence. Large sums of unrealized losses on bank balance sheets continue to raise concerns.

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Yellen reaffirmed her commitment to ensuring the stability of the smaller banks.

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"Treasury is committed to maintaining the robust community and regional financial institutions' health and competitiveness,” she said.