Yellen says banking system is 'sound,' defends Biden's budget before Senate

U.S. Treasury Secretary Janet Yellen told lawmakers on Thursday that the U.S. banking system is "sound" — following government action taken over the weekend to protect depositors at two failed banks — and defended the president's budget.

"I can reassure the members of the committee that our banking system is sound, and that Americans can feel confident that their deposits will be there when they need them," Ms. Yellen said in her opening statement before the Senate Finance Committee. "This week's actions demonstrate our resolute commitment to ensure that our financial system remains strong and that depositors' savings remain safe."

On Sunday, the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. seized Signature Bank, following a March 10 seizure of Silicon Valley Bank, in which they said all depositors will be protected, according to a joint statement.

When asked by Ranking Member Mike Crapo, R-Idaho, if SVB faced a liquidity risk issue, Ms. Yellen said the bank had to be closed because of "a massive withdrawal of deposits that led to liquidity problems," following a run on the bank's uninsured deposits.

Several committee members blamed regulators for the recent bank failures, including Sen. Tim Scott of South Carolina, who also serves as the top Republican on the Senate Banking Committee.

"I believe that the state and federal regulators failed to appropriately use the tools they have to supervise and regulate the failed institutions," Mr. Scott said.

Sen. James Lankford, R-Okla., asked whether deposits of any size, at any community bank are now fully insured and should expect the same treatment as SVB or Signature Bank. Ms. Yellen declared that the circumstances were extreme.

"A bank only gets that treatment if 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," she told Mr. Lankford.

Separately, many Republican senators questioned President Joe Biden's $6.8 trillion budget plan, which the White House unveiled last week. The budget calls for raising the corporate tax rate to 28% from 21% and taxing capital gains at the same rate as income for households that make over $1 million, among a host of other changes.

"The bottom line is we must stop trying to solve this problem by massive new spending and massive new taxes," Mr. Crapo said, adding that there needs to be more discussion on what is the right approach to fiscal policy.

Sen. Chuck Grassley, R-Iowa, was one of several GOP lawmakers to criticize Mr. Biden's budget for its approach to Social Security, saying it does not adequately address the issue of insolvency. Currently, Social Security faces insolvency in 2035 — if that were to happen, the system would be able to pay about 80% of scheduled benefits, according to the Social Security and Medicare Boards of Trustees.

In a tense exchange, Sen. Bill Cassidy, R-La., asked Ms. Yellen where the president's plan is for addressing Social Security insolvency.

Ms. Yellen started to reply, "He stands ready to work with Congress" until Mr. Cassidy cut her off to say, "That's a lie. Because when a bipartisan group of senators has repeatedly requested to meet with him about (Social Security) ... we have not heard anything on our request. And we've made multiple requests to meet with the president."

After Mr. Cassidy's questioning, Chairman Ron Wyden, D-Ore., told committee members that "accusing witnesses of lying is over the line."

Mr. Cassidy responded that he did not mean to accuse Ms. Yellen of lying but was making "an empiric observation." Mr. Wyden repeated that "accusing witnesses of lying is over the line."