Federal Plan Could Become Bailout As Banks Continue To Reel

(KNSI) – Federal officials have offered a two-part plan to stabilize the banking system.

In addition to unlimited deposit insurance, banks that are deemed systemically important can avoid recognizing losses on United States Treasury bonds for a year. St. Cloud State University Professor King Banaian explains.

“You don’t have to recognize the loss. You can actually use it as collateral for a loan and get dollar for dollar, basically what you paid for it. And you can borrow that money for a year.”

The Treasury Department has set aside $25 billion for the program. There are questions over whether that is enough and whether the measure can stave off future bank failures like the ones seen in the past week.

Banaian says the loan program may turn into a bailout.

“That’s why you had Treasury pledge $25 billion out of its Exchange Rate Stabilization Fund to the Fed to backstop it. Because the Fed is not supposed to take a loss on this lending facility. So, if it turns out that the loan doesn’t get repaid, the loss goes back to taxpayers.”

Credit rating agency Moody’s said Tuesday U.S. banks were being cut to negative, meaning a downgrade is possible in the near future. The organization said the downgrade is because of a ‘rapidly deteriorating operating environment,’ specifically for regional banks.

The report says the federal backstop still leaves banks vulnerable in certain circumstances. “Banks with substantial unrealized securities losses and with non-retail and uninsured US depositors may still be more sensitive to depositor competition or ultimate flight, with adverse effects on funding, liquidity, earnings, and capital.”

___