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- The US banking system may be weaker than Powell and Yellen claim, Ed Yardeni said.
- That's because the government isn't in a position to extend blanket insurance over all deposits.
- US banks are sitting on $620 billion in bond losses, which could spell trouble if there are more bank runs.
The US banking system may not be as strong as Jerome Powell and Janet Yellen are saying, according to Ed Yardeni.
The market vet pointed to recent comments from the Federal Reserve Chair and the Treasury Secretary, in which both assured markets of the soundness of the US banking system. But that assurance itself raises doubts, Yardeni said in a blog post on Wednesday, as neither are in a position to extend FDIC insurance protection to all US deposits.
"Powell and Yellen need to get their acts together," Yardeni said. "They are trying to convince the public that they can keep their banks safe by providing access to additional sources of liquidity, which perversely raises doubts about the soundness of the banking system."
Markets have been fearing the safety and soundness of the banking sector since the collapse of Silicon Valley Bank earlier this month. Though some experts say the bank's failure wasn't a systemic issue, other banks have been showing signs of similar weakness since SVB's failure. A handful of regional bank shares have tanked, and First Republic Bank received a $30 billion injection from Wall Street lenders to shore up liquidity. In international banking, the Swiss government forced a sale of Credit Suisse to UBS to stave off a crisis in its system.
Though Yellen said the government was prepared to extend deposit protection to smaller banks, she clarified on Wednesday that she had no intentions of extending "blanket insurance" for all deposits, implying that the FDIC's coverage would only apply to deposits under the $250,000 threshold. That could be a frightening prospect, considering that only $7.4 trillion of deposits are under the threshold to receive FDIC insurance, while $10.5 trillion remain vulnerable, Yardeni said.
US banks are also sitting on $620 billion in unrealized losses in their bond portfolios, thanks to aggressive Fed interest rate hikes over the past year that have weighed heavily on bond prices. And though losses don't become realized until banks sell their bonds, they could have to if faced with liquidity issues in the event of a bank run, Yardeni said.
"We would feel better if both Yellen and Powell wouldn't feel the need to assure us that the banking system is sound," he added.
Critics have blamed the current turmoil in the banking system on ultra-loose monetary policy the Fed maintained over the past decade, which created a bubble in asset prices that is now bursting as the central bank aggressively tightens financial conditions.