The Federal Reserve has handed out hundreds of billions of dollars in the past week to avoid a banking crisis—one that President Joe Biden is eager to prevent from happening again.
Key Details
- According to the Federal Reserve’s Thursday report, the central bank lent $297 billion in emergency funds from Friday to Wednesday, in addition to $153 billion in lending against their collateral using “discount windows.”
- The spike in loans marked the highest number of requests the Fed has received in decades, eclipsing the 2008 financial crisis’s $111 billion discount window and the COVID pandemic’s $51 billion, Axios reports.
- In response to the ongoing turmoil, President Biden called for Congress on Friday to tighten banking regulations and impose penalties on banks “whose mismanagement contributed to their institutions failing.”
Why It’s Important
One week ago, the U.S. suffered the second- and third-worst banking collapses in history, with the destruction of Silicon Valley Bank (SVP) and Signature Bank, which destabilized the national banking system and sparked a liquidity crisis and bank runs.
The volume of emergency loans speaks to the sudden turmoil and stress that the entire banking system felt in the days after SVP collapsed. Despite being a relatively small California bank, SVP had tied to thousands of valuable Silicon Valley startups and ties to other financial institutions. The size of the impact spooked the entire system, causing similar bank runs.
The federal government’s bailout appears to have momentarily stemmed a national banking crisis. However, the instability of Credit Suisse suggests that the global financial system is shuddering under the weight of complex failures.
As we previously reported, politicians and analysts have pointed the finger of fault at many different factors, from underregulated banks to the Fed’s monetary tightening having a negative effect on safe investments underperforming ESG indexes. Plus, many argue, bailing out the banks creates less an incentive for them to manage their risk more carefully if they know they have a backstop.
Notable Quote
“The glass-half-empty view is that banks need a lot of money. The glass-half-full take is that the system is working as intended,” says JPMorgan Chase economist Michael Feroli.
“No one is above the law—and strengthening accountability is an important deterrent to prevent mismanagement in the future. When banks fail due to mismanagement and excessive risk-taking, it should be easier for regulators to claw back compensation from executives, to impose civil penalties, and to ban executives from working in the banking industry again,” says Biden.
