WASHINGTON- The US government will continue using its tools to prevent contagion in the banking sector, as warranted, to ensure Americans’ deposits are safe, the Treasury undersecretary for domestic finance, Nellie Liang, will tell the US Congress on Tuesday.
In testimony prepared for the Senate Banking Committee, Liang said decisive action taken by the federal government in recent weeks had worked to restore public confidence, protect depositors and bolster liquidity in the banking system.
“We continue to closely monitor developments across the banking and financial system,” Liang said in the remarks. “As Secretary (Janet) Yellen has said, we have used important tools to act quickly to prevent contagion. And they are tools we would use again if warranted to ensure that Americans’ deposits are safe.”
Investors have dumped banking stocks globally over the past two weeks, with the Federal Reserve’s rapid interest rate hikes to rein in inflation blamed by some as the root cause of the debacle.
Liang said recent developments were “very different” from those during the global financial crisis of 2008-2009, when many institutions came under stress because they held low-quality credit assets.
The financial system was now “significantly stronger” than 15 years ago, Liang said, given post-crisis reforms for stronger capital and liquidity requirements.
She said she supported a Federal Reserve review of the failures of Silicon Valley Bank and Signature Bank, and those reviews would inform any regulatory and supervisory responses.
“We must ensure that our bank regulatory policies and supervision are appropriate for the risks and challenges that banks face today,” she said, underscoring the importance of a diverse and dynamic banking system.
Mid-sized US lenders are getting creative as they try to hang onto customer deposits after two bank failures rattled consumers and spurred a $119 billion exodus from small institutions in recent weeks.
Industry executives discussed strategies to bolster trust in their institutions at an annual meeting of the Consumer Bankers Association conference on Monday in Las Vegas.
Paying higher rates on deposits is the most common way to make them stick, executives said.
The difference between banks’ promotional rates for new customers and average rates across the industry reached a record high this year as lenders competed for client deposits, according to Curinos, a bank data provider. The differential more than doubled between 2018 and 2023, from 1.4 to 3 percentage points.
Although high rates can attract deposits in the short term, other strategies may be more effective in the long term, said Adam Stockton, a director at Curinos.
For instance, customers who had greater trust in their credit unions and older small banks stayed put while others rushed to move their funds, he said.
“Trust does not necessarily come from the size of a bank, but more from its profitability and relationships with the community,” said Angela Conti, general manager for deposits and retail payments at USAA Federal Savings Bank.
