The Federal Reserve is looking for ways to keep banks from defaulting on loans, the most significant threat to U.S. economic recovery, the bank said Friday.
The Fed has issued nearly 4 trillion dollars in new credit to banks, with the vast majority of it coming this year, but some banks are continuing to fail.
A growing number of them are using collateral, the Fed said, that is not legally binding and which banks have to repay in full if they default on loans.
It’s a strategy that has led to some bank failures, including in London, where a failed Royal Bank of Scotland, which was bailed out by the government, went bankrupt.
The latest warning comes in response to a survey by Bankrate, a financial website.
The survey found that nearly a quarter of banks surveyed were defaulting, up from 22 percent in July.
The problem is, that a majority of the banks are still failing.
Banks have been struggling to keep their businesses afloat amid plunging interest rates, the Federal Reserve said.
“We are not able to keep up with the rate of growth,” Janet Yellen, the central bank’s chairwoman, said in a speech at the Brookings Institution in Washington.
Yellen noted that the Fed was already in a debt trap and was “too cautious” in raising rates.
“I think we need to get back to where we were at a couple of years ago,” she said.
The Federal Open Market Committee, the U.N. central bank, said it would be issuing new rules to reduce the likelihood that banks will default.
Yerevan, Armenia, and the United States’ biggest banks have been among the biggest lenders to companies in Greece and Spain, where banks are failing to repay debts.
Yields on bonds issued by the largest U.K. and German banks, which hold about 90 percent of the country’s debt, are falling.
Bank of America, which also has some $3 trillion in cash reserves, is taking the next step and making it easier for banks to repossess their assets.
The bank will be able to sell those assets for a lower price, but that is still only $30 billion.
“If we were to start selling assets for cash, it would cause a panic,” John Williams, a senior economist at the Bank of England, told Reuters.