You may have noticed that the entire American banking system has been in a state of panic for the past few days. It is now known that the big banks will be rescued if they run into problems, but there is still uncertainty about the smaller boys. Janet Yellen, the US Treasury Secretary, now says the government would take similar measures for small banks if necessary.
Will peace return?
It is to be hoped that statements like this from Yellen will finally bring peace to the financial system. “Our intervention was necessary to protect the broader US banking system. Similar measures may be needed if smaller financial institutions run into problems that threaten the entire system.” thus Yellen.
In doing so, she indicates that small banks would also be rescued, provided that the collapse of those banks would pose a threat to the entire financial system. So she adds a small caveat.
In general, Yellen is optimistic about the developments of the past few days. “The situation is stabilizing and the US banking system remains safe. The support facilities at the Federal Reserve are functioning properly and are providing the banking system with the necessary liquidity. Furthermore, withdrawals from regional banks are also decreasing,” says an optimistic Yellen.
Take care of the little ones
In recent days, concerns have arisen in the United States in particular about smaller and regional banks. This is because it is a certainty that large banks will receive support if they threaten to collapse, because they are so large that they would otherwise pull the entire financial system with them.
This is not the case for the regional and small banks, which means that they may not receive support and that customers there are therefore not protected against bankruptcy. The result of that line of thinking is that many people choose eggs for their money and move their capital to a bank large enough that it will be bailed out anyway.
What you then get is that the big banks profit from the banking crisis at the expense of the smaller guys. That is of course not the intention, which is why Yellen has now said that these measures are probably also ready for any smaller banks that fail.