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Yellen: Debt limit breach would be ‘devastating’ for banks

Treasury secretary says banking system is sound, but market-rattling debt standoff could change that

Treasury Secretary Janet L. Yellen testifies during a Senate Finance Committee hearing on President Joe Biden's fiscal 2024 budget request on Thursday.
Treasury Secretary Janet L. Yellen testifies during a Senate Finance Committee hearing on President Joe Biden's fiscal 2024 budget request on Thursday. (Tom Williams/CQ Roll Call)

Treasury Secretary Janet L. Yellen told senators on Thursday that the banking system remains sound in the aftermath of Silicon Valley Bank’s collapse. But she warned that failure to raise the debt limit in time would be devastating for banks after the turmoil.

The country’s fiscal and economic health took center stage at the Senate Finance Committee’s hearing with Yellen on President Joe Biden’s fiscal 2024 budget request, as senators pressed her over concerns about avoiding a debt ceiling breach, ensuring stability of the banking system, combating inflation and shoring up Social Security’s finances.

In a new refrain on the debt limit fight, Democrats and Yellen tied the failure of Santa Clara, Calif.-based Silicon Valley Bank, and the subsequent collapse of New York-based Signature Bank, to the need to raise the limit before the government can’t pay its bills in full. Experts’ estimates for when that would happen range from June to mid-August.

“One of the most important steps that Congress can take now is to make sure there are no questions about the full faith and credit of the United States,” Senate Finance Chair Ron Wyden, D-Ore., said. “That means paying the bills incurred by presidents of both parties.”

Sen. Bob Menendez, D-N.J., pointed out that a lending program implemented to address the SVB collapse is backed up by Treasury securities and the inability of the Treasury to pay its bills on time could have a cascading effect on those loans.

Yellen responded that the possibility would be beyond contemplation and said breaching the debt limit would be “completely devastating” for regional banks and the financial system at large.

Democrats also targeted a Republican bill to prioritize some federal payments over others if the debt limit is breached, after the GOP-controlled House Ways and Means Committee approved that legislation last week.

The Finance panel’s top Republican, Michael D. Crapo of Idaho, pressed Yellen for engagement in negotiations with the GOP on fiscal restraint measures that would be tied to a debt limit increase and dismissed Biden’s proposal to increase taxes as a means of deficit reduction.

Yellen said Biden was prepared to discuss and negotiate his plan with Republicans, but she reiterated the administration’s stance for a “clean” debt limit increase.

“It can’t be a condition for raising the debt ceiling,” she said. “The debt ceiling simply must be raised.”

Senators on both sides of the aisle peppered Yellen with questions on the SVB collapse. She said the banking system remains sound after regulators stepped in to protect depositors and that Americans can feel confident in the reliability of their deposits.

[Lawmakers from both parties skeptical of legislation over SVB]

Several Republicans, including Crapo, blamed Biden administration policies along with regulators for the banking woes, pointing to high inflation as well as the Federal Reserve’s ensuing interest rate hikes.

Some Democrats, including Sen. Elizabeth Warren of Massachusetts, are pressing to repeal a 2018 law that eased regulations for some banks as a response. But one moderate Democrat who played a lead role in that law, Sen. Mark Warner of Virginia, pointed to an interest in addressing social media’s role in spurring the run at SVB.

Social Security, tax talk

Republicans also pressed Yellen on whether the president has a plan to shore up Social Security’s finances, with estimates predicting the government won’t be able to pay benefits in full in about a decade.

Sen. Bill Cassidy, R-La., questioned whether it would be realistic to impose Biden’s $4.7 trillion in proposed tax increases on households making over $400,000 per year and corporations while also expanding the payroll tax that funds Social Security, as Biden has previously supported. That proposal was not in Biden’s budget request.

[White House blueprint would raise taxes, boost spending]

Cassidy also said the president hasn’t responded to meeting requests from a bipartisan group of senators working on a proposal to shore up Social Security’s finances that he’s leading with Sen. Angus King, I-Maine. Yellen reiterated Biden’s commitment to seniors and that he is ready to work with Congress on the issue.

While much of Yellen’s appearance was dedicated to new economic concerns, senators asked questions on a range of tax issues. Republicans pressed Yellen on the Treasury Department’s international tax negotiations and stance on extending provisions of the 2017 GOP tax law that expire after 2025.

Several Democrats urged bipartisan work to expand tax incentives for affordable housing amid a shortfall in the housing supply. Biden’s budget included requests to expand housing tax credits and Finance held a hearing this month on proposals including a package from Wyden, who vowed to take up the issue.

“The only matter that’s off the table is taking a pass on it,” Wyden said. “We’ve got to act.”

Wyden also joined House lawmakers from both sides of the aisle who raised concerns to Yellen last week about how Treasury is interpreting rules for clean vehicle tax credits from Democrats’ August budget reconciliation law. To qualify for the full subsidy, a certain portion of critical minerals used in a vehicle’s battery must be sourced from the U.S. or countries with a free trade agreement in effect.

That could exclude some allies like the European Union and Japan, but the Biden administration is seeking ways for more allies to qualify and launched negotiations last week with the EU on a targeted trade agreement for critical minerals.

Wyden said he has “serious concerns” about the administration’s actions and that Congress’ purview over trade would still apply to a critical mineral-specific agreement.

“Free trade agreements cannot be unilaterally decided by the executive branch,” he said.

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