WASHINGTON, D.C. – U.S. Senator Bob Menendez (D-N.J.), a senior member of the Senate Finance Committee, this week questioned the U.S. Secretary of the Treasury, Janet L. Yellen, during a budget hearing on the recent bank failures and asked her how damaging a debt default would be to the nation’s economy and banking sector, particularly regional banks.
“The Federal Reserve’s emergency lending facility is predicated upon the notion that Treasury and agency securities have no credit risk. That facility will be extending loans of up to one year using these securities as collateral,” Menendez said. “But one potential problem is that unless Congress raises the debt ceiling in the next few months, US Treasury and agency securities will face the prospect of default. Now, while I certainly won’t vote to default on the debt, I think some of my colleagues may not feel the same way.”
Menendez asked if the U.S. defaulting on Treasury securities would create a cascading effect in the banking industry. The Secretary confirmed that if Congress fails to raise the debt ceiling well before any default that we could run the risk of seeing more runs on regional banks.
“The fact is that a debt ceiling fight has always been dangerous. It’s dangerous for our financial system, it’s dangerous for our businesses, and it’s dangerous for working families, and it’s dangerous to put at risk the US dollar as the reserve of choice in the world, which others are seeking to replace us in, which has enormous benefits to us,” Menendez said.
Sen. Menendez also asked Secretary Yellen about whether Silicon Valley Bank’s failure posed systemic risk to the entire financial system.