US Fed Tries to Avoid the Negative Effects of a Potential Financial Crisis in Europe

August 19 00:00 2011

New York, August 18 (TheAlphaReporter.com) – High officials of Federal Bank Of New York have been in constant talks with the heads of major European banks like Societe Generale, Deutsche Bank, Lloyds TSB etc. over the past few weeks. The reason behind this scepticism is Fed worrying a replay of the 2008 global financial crisis which began in America and spread across the globe. The Fed is taking measures to ensure that the US banking system is insulated against the possible spill over of the failure of the European economy.

What Happened in 2008

In 2008, American banks faced a liquidity crunch in the US. To repay the borrowers back, they had to liquidate their assets worldwide in a jiffy. This led to selloff’s across the globe as US banks held significant assets worldwide creating the negative feedback loop and the recession that followed.

What Are US Fed’s Worries

Fed is afraid that this time the liquidity crunch maybe caused due to the poor state of affairs in Europe. Since many European banks have major operations across US and these operations are largely funded by borrowed money, a liquidity crunch in Europe could spill over into US and then the world.

What Is Fed Doing To Prevent A European Spill Over Crisis

Fed is constantly reviewing the liquidity and solvency positions of the major banks in US. This time the Fed wants to take no chances and is making efforts to prevent a spill over crisis than to cure it.

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