Friday, 09 June 2023 01:16 GMT

Failure of Small Banks Can Trigger Systemic Failure, Says US Treasury Chief

(MENAFN) Janet Yellen, the head of the US Treasury Department, warned that the failure of a small bank, such as a community bank, can trigger a systemic failure, leading to a run on other banks. Yellen made these comments before the Financial Services and General Government Subcommittee in the US Senate, following the recent sudden demise of several small banks, including Silvergate Bank, Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank.

Yellen specifically highlighted the calamitous run experienced by SVB, which overwhelmed the liquidity of the bank and created fear about the safety of uninsured depositors in many other banks. This run on SVB also risked contagion throughout the banking system, underscoring the potential dangers of small bank failures for the broader banking system and the American economy.

The Treasury head emphasized that protecting the health of the US economy is their top priority, and officials are determined to mitigate risks to the banking system. Yellen urged lawmakers to take emergency actions designed to prevent systemic failure and stabilize aggregate deposit outflows from regional banks, which have stabilized.

The recent failures of small banks have raised concerns about the stability of the banking system and the potential for contagion. Yellen's testimony before the Senate highlights the need for greater regulatory oversight and measures to prevent small bank failures from triggering systemic failures.

As the US economy continues to recover from the COVID-19 pandemic, it is essential to ensure the stability of the banking sector, which plays a critical role in supporting economic growth and stability. The Treasury Department's efforts to mitigate risks to the banking system reflect their commitment to protecting the US economy and promoting financial stability.


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