Fed Stops ‘Too Big To Fail’ Lending For Banks

Too Big To Fail Measures

The Federal Reserve is ending the lending program that threw a life vest to banks as they started to fail during the 2008 financial crisis.

The Fed on Monday said it has adopted a new rule that limits its ability to lend emergency money to banks.

The new rule should is aimed at ending the notion that Wall Street banks are “too big to fail.”

This new rule was adopted out of the Dodd-Frank Act of 2010.

Under the new rule, banks that are going bankrupt — or appear to be going bankrupt — can no longer receive emergency funds from the Fed under any circumstances.

The lead to end the too big to fail program was heralded by Senator Elizabeth Warren. “There are still loopholes that the Fed could exploit to provide another back-door bailout to giant financial institutions,” the Democrat told CNNMoney.

The new rule doesn’t completely stop the agency from lending money to banks. The Fed is still allowed to judge by its own measures whether a firm qualifies for its emergency aid.

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While the Fed can still choose to loan money during times of emergency, the bank must be able to pay back that money.

“It’s very hard to judge in real time whether a firm is insolvent or just having liquidity problems because it becomes impossible to price assets,” says Paul Ashworth, chief U.S. economist at Capital Economics, a research firm.

“It’s up to Congress to close those loopholes and ensure that Fed emergency lending is limited to protecting the economy and not to saving a few favored banks,” Warren tells CNN Money.

The Fed is working non-stop to prevent another financial crisis. The agency performs mock financial crisis scenarios to determine if banks can pass a stress test. It has also began requiring that banks keep more cash on hand to deal with a financial crisis.

Written by Jeff Springer

Jeff Springer

Jeff Spring is the Finance & Markets Editor at BusinessPundit.com. He's currently spending his days backpacking across Europe. While he may be living outside of the United States, he stays connected to American financial markets and M&A's more than is probably healthy for any single person. His love of a good book and a Bloomberg terminal can't be understated.