Fed wants to shield taxpayers when banks go down

By Money Times

Nov 03, 2015 08:05 PM EST

The Federal Reserve is implementing new rule especially in a bid to strengthen the global financial institutions. 

According to the proposal, all banks that operate in the US will be able to go down smoothly without causing too much collateral damage to the public.

The New York Times reported some details regarding the new rule in their latest article. According to the article, the Fed is planning to put the burden cost of bailing a bank into the hand of the investors and shareholders rather than on taxpayers.

The 2008 financial crisis showed how  government intervention is needed to bailout these failing bank using the taxpayers' money to make sure these banks still surviving.

The Fed also plans to increase the requirement for the financial condition of each bank. According to the plans, the bank will soon require higher capital for an operation to ensure that it could buffer itself from any potential losses.

According to Bloomberg, a bank could face up to $120 billion total shortfalls of long-term debt.

Under the same plan, banks will also be required to hold enough debt which could be converted into equity when in need and the government will review the process.

The amount of debt that needs to be held will vary according to the size of the bank. The Fed said that the debt required is around 16 percent of risk-weighted assets by 2019 and 18 percent by 2022.

The Federal Reserve chairperson Janet L. Yellen said in a statement that "the proposal is another important step in addressing the 'too big to fail' problem."  

The Fed plan is to put priority on the taxpayers' money and the plan according to Yellen, "would substantially reduce the risk to taxpayers and the threat to financial stability stemming from the failure of these firms."

According to The Economic Times, there are eight banks listed under the Fed that will be under this new requirements.

Among them are Goldman Sachs, Morgan Stanley, State Street, Bank of New York Mellon, Bank of America and Wells Fargo.

The analyst predicted that this new regulation will change the course of the market and making it better. Now, all investors are required to make their investment wisely instead of just pouring money into any banks.

The Federal Reserve also hopes that there will be fewer cases like the collapse of Lehman Brother in the future through this new regulations. However, it is still unclear whether the government will really go through with the new plan when the banks are really collapsing soon. 

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