Analysis: Bank Failures May Lead To Dramatic Federal Action

The recent wave of bank failures may lead to the unprecedented growth of federal power if current trends continue. The 2008 doctrine of “too big to fail” may be a blueprint for a much larger bank rescue plan that could effectively bring large financial institutions under government control.

The 2008 banking crisis demonstrated the lengths to which the federal government would go to preserve the interests of the nation’s large banks. The Troubled Asset Relief Program used $700 billion in taxpayer dollars to bail out large financial institutions.

Swift action by the Federal Reserve, the Treasury Department, and the FDIC appeared to shore up the former assets of Silicon Valley Bank (SVB). While the Fed is confident that the risk of contagion is reduced, if more bank failures occur, the federal government may have fewer and fewer policy options.

However, the Biden White House may act far further in another direction should things get worse. In particular, the Biden administration is using a new program called the Regulated Liability Network U.S. Proof of Concept.

According to the New York branch of the Federal Reserve, the program is a three-month project that “will experiment with the concept of a regulated liability network (RLN).”

Under this system, the Federal Reserve will potentially draw together resources of several of the nation’s largest banks, including Wells Fargo, Citi and Mastercard.

This “ledger-based network” harkens to the idea of a Federal Reserve-created digital dollar that would replace traditional currency. This could lead to a dramatic increase in federal control over the nation’s banking and personal finance.

The pressure on Washington may further increase as the risk of recession grows. The difficult position the Fed is in may spark a concerted effort to contain the runaway effects of inflation. In particular, raising interest rates to slash inflation may cause more bank failures.

Minutes from the Fed reveal that members of the central bank are concerned that there will be a recession later in 2023.

The effects of the pandemic and recent bank failures have led to a significant increase in the balance sheet of the Fed.

The Federal Reserve now holds more than $8.6 trillion in assets, approximately ten times the amount held prior to the 2008 crash and about four times the holdings after the start of the Great Recession.