Her comments before a Senate Appropriations subcommittee hearing dashed industry hopes for a quick government guarantee to stem the threat of further bank runs and contributed to a 15.5% fall in the shares of struggling First Republic Bank (FRC.N) on Wednesday.
Some banking groups have urged the Biden administration and the Federal Deposit Insurance Corp (FDIC) to temporarily guarantee all U.S. bank deposits, a move they say will help quell a crisis of confidence after the failure of Silicon Valley Bank (SIVB.O) and Signature Bank (SBNY.O).
Reuters reported on Tuesday that government officials discussed the idea of raising the $250,000 insurance limit per depositor without congressional approval following the SVB and Signature closures.
Yellen said she believed it was "worthwhile" for Congress to look at changes to FDIC deposit insurance, but declined to say what changes she thought were warranted.
But when asked whether insuring all U.S. deposits required congressional approval, Yellen said she was not considering such a move and was reviewing banking risks on a case-by-case basis.
"I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits," she said.
When a bank failure "is deemed to create systemic risk, which I think of as the risk of a contagious bank run...we are likely to invoke the systemic risk exception, which permits the FDIC to protect all depositors, and that would be a case-by-case determination."
She said this determination was not reserved for only large or mid-size banks but could also apply to smaller banks if there was a risk of contagion.
"The failure of a small bank, of a community bank, could likewise trigger a run on other banks," she said.
Shares in beleaguered First Republic Bank (FRC.N), which has lost much of its value since the U.S. banking crisis started on March 8, dropped 15.5% to end Wednesday at $13.33 following Yellen's remarks. The troubled San Francisco-based lender's efforts to secure a capital infusion has fueled speculation it may need a government backstop.
Yellen told the Senate's Appropriations Subcommittee on Financial Services and General Government that banks nationwide were worried about contagion from the bank failures, and were building up their liquidity to guard against further runs.
She attributed the need to protect uninsured deposits in SVB to its "highly unusual" business model focused on the tech sector, high percentage of uninsured deposits and high, unhedged interest rate risk, along with the speed of withdrawals as it failed.
"To the best of my knowledge, we've never seen deposits flee at the pace that they did from Silicon Valley Bank," Yellen said.
Any losses to the FDIC's deposit insurance fund due to the bank collapses will be recovered by a special assessment on banks, the FDIC has said. Yellen said it was "not obvious" that banks would pass those costs on to bank customers.
Yellen also said the Treasury Department was working to restore the Financial Stability Oversight Council's (FSOC) ability to designate non-bank financial institutions as systemically important, subjecting them to stronger regulations.
This reflects concerns that financial risks may be migrating to less-regulated hedge funds and so-called "shadow banking" institutions.