Not All Uninsured Deposits Will Be Government-Protected in Future Bank Failures: Yellen

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)

Not all Americans' uninsured deposits will be protected by the federal government in the event of future bank collapses, Treasury Secretary Janet Yellen warned during a hearing before the U.S. Senate Finance Committee on March 16.

"I can reassure the members of the committee that our banking system remains sound and that Americans can feel confident that their deposits will be there when they need them," Yellen told senators in the wake of the collapse of Silicon Valley Bank and Signature Bank.

"This week's actions demonstrate our resolute commitment to ensure that depositors' savings remain safe," she added, referencing the government's emergency actions to ensure account holders are able to retrieve their deposits.

Such actions include the Federal Deposit Insurance Corporation (FDIC) allowing depositors with more than $250,000 at the impacted banks to get their money back. Typically, the FDIC, an independent government agency, covers a deposit insurance amount of $250,000 per depositor at insured financial institutions, while amounts over that threshold are considered uninsured.

However, Yellen warned that not all depositors will be protected over the FDIC insurance limits of $250,000 per account in the future, as has been the case with the two failed banks.

Instead, uninsured deposits would only be covered in the event that a "majority of the FDIC board, a supermajority of the Fed board, and I, in consultation with the president, determine that the failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences," Yellen said.

Small Banks Could Suffer

That means that depositors with amounts beyond the threshold at banks that collapse in the future may be looking at a serious loss.

Responding to Yellen's comments, Sen. James Lankford (R-Okla.) raised concerns that the government declining to cover uninsured deposits over $250,000 at small banks could prompt Americans to pull back from holding their money in such institutions, owing to fears of losing their money if such a bank were to collapse.

"We have seen the mergers of banks over the past decade. I’m concerned you’re about to accelerate that by encouraging anyone who has a large deposit at a community bank to say, ‘We’re not going to make you whole, but if you go to one of our preferred banks, we will make you whole,'" Lankford said.

"That’s certainly not something that we’re encouraging," Yellen responded, while also acknowledging that this is something that is happening right now.

The Treasury secretary said that the government believes Americans are racing to pull their deposits from certain banks over concerns about the recent bank failures and that other banks may also fail.

However, Lankford responded that this was actually happening because "you're fully insured no matter what the amount is if you're a big bank but you're not fully insured if you're at a community bank."

Study Finds Multiple Banks at Risk

Yellen then defended the government's intervention in Silicon Valley Bank and Signature Bank, stating that the government felt there was a "serious risk of contagion that could have bought down and triggered runs on many banks," and that something needed to be done.

More than $9.2 trillion of U.S. bank deposits were uninsured at the end of last year, accounting for more than 40 percent of all deposits, according to U.S. central bank data.

Elsewhere, a recent study conducted by researchers with the Social Science Research Network found that nearly 200 more banks across the United States could be vulnerable to the same type of risk that saw Silicon Valley Bank collapse.

According to that study, approximately 186 banks across the country could collapse if half of their respective uninsured depositors withdraw their funds.

"Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk," the study authors wrote. "If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk."

Independent Community Bankers of America (ICBA) President and CEO Rebeca Romero Rainey denounced Yellen's comments that uninsured deposits will be protected only at systemically risky banks in a statement on March 16, calling it a "bailout for big banks that rewards mismanagement and risky behavior to the detriment of community banks and the communities they serve."

"Secretary Yellen’s statements that only the largest and riskiest institutions will be bailed out by regulators underscore what ICBA has long said: unlike too-big-to-fail institutions, community banks don’t need government bailouts because they operate under a safe, sound, and relationship-based banking model that has withstood economic cycles," Rainey said.