On Monday, the Federal Reserve issued new rules that limit its powers to save collapsing banks from disaster by granting them emergency money. The move is a delayed reply to criticism that federal money was used to prop up ‘too-big-to-fail’ financial giants when the financial crisis emerged in 2008.
According to the new rules, emergency money would be granted just in case of a “broad-based” issue in the system, that affects a large number of banks rather than providing customized lending programs to a select few. The new rules require at least five banks to be affected for the Federal Reserve to take action.
The shift stems from the provisions of the 2010 banking reform bill, which was designed to prevent another major crisis and to prevent taxpayer money from being used in bailouts for private financial institutions.
Under the 2010 reform bill, the feds barred any emergency lending to ‘insolvent’ banks. And Monday’s rules expanded the term to banks that couldn’t or refused to pay ‘undisputed debts’ in the last three months.
But the new rules do not bar the Fed from intervening and lending a hand to collapsing banks in case of a major emergency. The rules were designed to prevent big banks’ managers from taking too much risk since the feds would throw them a lifesaver at any time. The issue is called a ‘moral hazard, and a plethora of politicians and consumer rights advocates fought for it to be addressed in new legislation in the aftermath of the financial crisis.
Critics argued that bank executives took tremendous amounts of risk to boost overall profits and their paychecks, knowing that the Fed would bail their banks out. Fed Gov Daniel Tarullo told reporters that the new set of rules strive to discourage moral hazard while also keeping the system flexible.
But some members of Congress said that the rules are not enough. Congressman Jeb Hensarling, the head of the House Financial Services Committee, recently noted that ‘too-big-to-fail’ financial institutions are still a reality in our times and the new rules would do nothing to change that situation.
Hensarling added that the Fed ‘leaves the door open’ to other taxpayer-funded emergency money and that moral hazard is at the very center of how these mammoth banks still operate.
Under the new rules, the Secretary of the Treasury will be required to sign off any emergency money. Additionally, emergency money won’t be granted if no “unusual and exigent circumstances” are involved.
Fed Chairwoman Janet L. Yellen argued that emergency money is still needed to tackle crises in the financial world that may have ‘adverse consequences’ on families, firms and the U.S. economy.
Image Source: Flickr
Latest posts by Nathan Fortin (see all)
- The End of Life Option Act Already Used by 111 People - Mar 11, 2019
- Senate Decided to Kill Rule that Promotes Retirement Plans - Mar 11, 2019
- BlackRock Is Turning to Robots for Improved Stocks - Mar 11, 2019