The US Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Federal Housing Finance Agency (FHFA) are all part of the $10.7 trillion Wall Street bailout package.
But they are also under intense pressure to get the money out of the system as fast as possible.
And a new study suggests the government might be able to make it happen.
Read moreThe report, commissioned by the US Federal Deposit Service (FDIS) and published on Wednesday, found that, at the very least, the US financial system might be “sufficiently robust to withstand any future shocks”.
“This is because the US government will not need to act in the short term to provide the necessary liquidity to the banking system,” the report says.
The report said the government has the power to “take immediate actions to raise funds” for banks and the financial sector, and “should use this authority to provide sufficient liquidity and support to ensure financial stability in the long term”.
“The key is that the government will have sufficient resources to ensure that it has the ability to provide adequate funding to all stakeholders in the financial system, including the banks, the financial firms, and the wider financial system,” it says.
In the past, the FDIC has been criticised for being slow to act to protect banks and other financial institutions from the economic fallout from the financial crisis.
But the report’s authors say this time it will be different.
The FDIS has said that in recent years it has been “very supportive” of banks, as they have been able to pay their backstops and other costs, without having to resort to the kind of capital injections that many of the US’s biggest financial institutions are now required to do.
“The FDIC’s recent support for banks has been based on strong evidence that it was able to provide financial assistance that was sufficient to offset the cost of bank recapitalisation,” the FDIS said in a statement.
“This is not true of the other financial sector actors.”
However, this week’s report found that banks’ liabilities were growing faster than their assets, and that the financial institutions that held the majority of the mortgage debt had a “significant” risk of insolvency.
“It is unclear whether the FDICS would be able, or would be willing, to provide enough liquidity to all the financial participants, and this would be a critical factor for financial stability,” the authors said.
“Without the ability for the FDIs to provide liquidity to banks, they will be unable to support the financial stability of the financial market and its customers,” the researchers concluded.
The FDIS also said it would be “appropriate” for it to have more flexibility to make loans to banks that had “high levels of capital” if that meant that banks could repay loans more quickly.
The study said that the FDI was “well positioned” to be able “to quickly and safely” provide “sufficient liquidity” to the financial markets.
But it warned that banks might not be ready for this “immediate action”.
“The FDIs current capital requirements may not be sufficient to cover the increased risks that the US economy faces in the event of a large-scale credit default event,” the study said.
“The lack of sufficient capital is likely to exacerbate the severity of future defaults in the US.”
What the report saidThe authors, including economists at the University of Massachusetts and the University at Albany, say the US may need to consider imposing new capital requirements on banks in order to support their operations in the face of a possible credit default.
“The extent of the risk that banks face in the future depends on the extent to which they are able to borrow to cover short-term capital needs, such as a recapitalization, or the ability of the government to provide a long-term funding solution,” they wrote.
The authors suggest that a financial institution could choose to sell CDS to investors to help fund their business.
They also suggested that banks be required to use CDS as a “lump sum” to pay off creditors.
But the report warns that this could be expensive, and may have to be done in the private sector.
The US government has been under intense scrutiny from regulators, as the financial industry has become more toxic over the past year.
In the latest round of scrutiny, the Financial Stability Oversight Council (FSOC) has been investigating the financials sector, the Securities and Exchange Commission (SEC) has launched an investigation into the financial services sector, as well as a separate probe into hedge funds.