As Treasury Secretary, Janet Yellen was faced with a developing banking crisis and had to come up with a plan to calm the U.S. economy before sunset on Sunday, March 12. To tackle the crisis, Yellen turned to Hank Paulson, who ran the Treasury Department during the financial crisis in 2008, for advice.
Paulson advised immediate government action, stating that it’s challenging to stop or slow down a bank run, and doing so requires a powerful and quick government response. The bank run on Silicon Valley Bank had begun earlier in the week, and regulators took it over by Friday afternoon, causing panic among shareholders and depositors and reminding them of earlier failures that triggered the Great Recession. Yellen brought her extensive resume and experience to the office, including serving as the chair of the Federal Reserve and a lifetime of studying economics and finance. She worked to assure multiple constituencies, including financial markets, balky Republicans in Congress, and President Joe Biden’s White House economic team, to tackle the crisis.
During the crucial period, Yellen assembled a group of officials, regulators, lawmakers, and Wall Street executives to tackle the developing banking crisis. The group included Federal Reserve officials, regulators at the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, congressional leaders on banking such as Sen. Sherrod Brown and Rep. Patrick McHenry, and Wall Street executives like Jamie Dimon, the chief executive of J.P. Morgan & Chase. While many could offer advice and input, few could relate to the situation as well as Hank Paulson. As the former Treasury Secretary who had asked Congress for authority to buy up $700 billion in distressed mortgage-related assets from private firms to save the larger U.S. financial system during the 2008 financial crisis, Paulson had experienced a similar situation.
Paulson’s words to Yellen were, “We are fighting for the survival of our regional banks.” The Fed defines regional banks as those with total assets between $10 billion to $100 billion, which are neither as small as community banks nor as large as national banks. Regional and community banking organizations are the largest number of banking institutions supervised by the Federal Reserve.
