Fed adopts new rules to end 'too big to fail' notion on troubled banks

The Federal Reserve approved Monday the adoption of new measures that would limit its ability to bail out big banks that are in trouble.

According to CNN, the new rule will put an end to the idea that giant Wall Street banks are "too big to fail," which essentially means the government has to come to their rescue whenever they face crisis.

The Feds adopted the Dodd-Frank Act of 2010, which made a series of changes after the financial crisis. The new measures basically prohibits the Fed from giving emergency funds for banks that seem to be going bankrupt. According to Fed chair Janet Yellen, the government wouldn't have bailed out giant insurance firm and Bear Stearns if the ne rule was implemented during the latest financial crisis.

Reuters reported that during the height of the 2008 financial crisis, the Fed used its little-used emergency lending capabilities to bail AIG out. It also lent JPMorgan Chase & Co money to minimize its losses after acquiring Bear Stearns, which was on the brink of bankruptcy. The Fed made more general emergency programs that amounted to $710 billion in loans to various financial companies.

Back in September 2008, the Fed did not provide emergency funds for the Lehman Brothers, since it was not solvent according to central bank senior officials. That led to the investment bank to file bankruptcy. The crisis-era loans were repaid and ended, giving the central bank a $30 billion net profit.

"Five years after Dodd-Frank became law, 'too big to fail' is unfortunately alive and well and this rule from the Federal Reserve doesn't change that," said Congressman Jeb Hensarling in a report by Fox.  "Indeed, by leaving the door wide open to future taxpayer-funded bailouts, this final rule compounds the moral hazard problem that lies at the core of 'too big to fail.'"

The new rules will also require every emergency lending programs to be approved by the Secretary of the Treasury. There should be an "unusual and exigent circumstances" pre-condition before an emergency credit program can be authorized.