Bank bailout in US offers roadmap for crisis in Europe
Analysis: The bank bailout of 2008-2009 could be a guide for the euro zone – but will it be a good guide? Remember that the US's bank bailout angered many Americans.
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The Fed would fall back on its role as lender of last resort, offering liquidity against good-quality collateral to ease bank funding pressures. It has already opened swap lines with foreign central banks, providing U.S. dollar liquidity internationally to prevent a dollar funding squeeze.Skip to next paragraph
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During the financial crisis of 2007-2009, the Fed invoked emergency powers to take an array of unorthodox steps. They included standing behind the fire sale of Bear Stearns to JPMorgan Chase, and other programs ensured financial firms were always be able to obtain short-term funding.
The Dodd-Frank regulatory overhaul enacted last year with a goal of making a future crisis less likely has restricted the Fed's emergency powers.
It must now obtain U.S. Treasury approval before putting special measures into motion, and it can no longer assist an individual company. However, there is little doubt the Treasury would sign off on Fed actions if Europe's crisis washed up on U.S. shores in a menacing fashion.
The Federal Deposit Insurance Corp's temporary loan guarantee program, which put the government behind bank-to-bank lending and calmed fears of counterparty risk, could also be useful, analysts said.
FSOC SEEN BOOSTING SCRUTINY
One edge authorities would have is institutional. Congress created a super-regulatory agency, the Financial Stability Oversight Council (FSOC), to sniff out potential risks to the broader financial system.
Treasury Secretary Timothy Geithner chairs the council, which has authority to brand large firms as systemically important, requiring them to increase capital holdings.
The FSOC could carefully parse individual firms' bets on European banks and euro area sovereign debt to identify any concentrations that could cause dominoes to start toppling.
``If I'm Geithner, when I get back from (the Group of 20 summit in) Cannes, I'm calling the regulators, and I'm telling them, 'Let's get a serious handle on what the exposure is,''' said Terry Haines, an analyst for the Potomac Research Group.
While memories of the recent bank bailouts are still fresh, and with a U.S. general election looming a year from now, any rescue measures are sure to draw criticism. However, if the financial system begins to exhibit the same strains as at the height of the previous crisis, the public could become more accepting of attempts to keep the financial storm at bay.
``It's true that the public has little appetite for more intervention, but if financial markets are melting down, the authorities will have little other choice but to act,'' said New York University economics professor Mark Gertler.