The Federal Reserve will no longer save major banks that face a financial crisis. Essentially, it’s supposedly reversing its policy of lending money to financial institutions that are deemed “too big to fail.”
On Monday, the United States central bank imposed a new rule that limits its ability to lend emergency money to big banks. However, this means that when “too big to fail” banks come running, they will now turn to the federal government to save them throughout an economic crisis.
As part of the Fed’s new rule, banks facing bankruptcy can’t receive emergency funds from the central bank. It doesn’t matter what circumstances they may face. The Fed won’t have the ability to provide any financial lifeboat to any bank. Sounds good, right? Not quite.
When delving deeper into the rule, the Fed can still lend money to banks during an emergency, but the bank must pay it back the principal. The Fed must use its own measurements to determine if a bank qualifies for emergency aid. This can be difficult to assess.
It sounds complicated, and many policymakers agree. This is why they’re urging the Fed to impose clearer guidelines and language. At first glance, the Fed won’t give financial aid under any circumstance. At second glance, the Fed won’t give financial aid under any circumstance, except what they deem necessary emergency assistance.
Essentially, if this rule was in place during the economic collapse, says Fed Chair Janet Yellen, the Fed wouldn’t have been lending out money to the likes of AIG, Bear Sterns, foreign central banks and banks overseas.
It’s certainly head scratching and makes you want to say: huh?
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