Fed’s longer-term shift from lender of last resort to lender of immediate resort
Without a clear distinction between temporary liquidity support and protection for insolvent institutions, the Fed’s independence turns into cover for ad hoc bailouts, and monetary policy becomes hostage to weak institutions and authorities’ reluctance to admit supervisory failure.
With each successive crisis over the past decade and a half, from the 2007-08 financial crisis to the 2020 COVID-19 shock and the 2023 regional-bank turmoil, the Fed has steadily expanded the scope and scale of its interventions.
What began as emergency liquidity support has now become a recurring feature of financial-market management.The turmoil of 2023 extended support to roughly $9 trillion in uninsured deposits, vastly expanding the safety net.
The benchmark for central-bank restraint was set by Walter Bagehot more than a century ago:
https://en.wikipedia.org/wiki/Walter_Bagehot
lend early and freely, but only to solvent institutions, against good collateral and at a penalty rate.
Under this elegant framework, the central bank supplies liquidity, the fiscal authority provides capital and markets impose accountability. Viable institutions are insulated from liquidity panics, while insolvent ones are restructured or shut down.
The key challenge facing policymakers is to determine whether an institution is solvent yet temporarily illiquid, or insolvent and therefore in need of restructuring.
If regulators cannot draw this distinction for banks, despite having granular supervisory data, they certainly cannot do so for nonbanks, where visibility is limited.
Amit Seru MarketWatch Jan. 2, 2026
Amit Seru is professor of finance at the Stanford Graduate School of Business and a senior fellow at the Hoover Institution.
Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs?
https://www.nber.org/papers/w31048
FDIC chief warns; 1980s savings and loan; 2008 financial crisis; 2023 regional bank runs
https://englundmacro.blogspot.com/2025/01/fdic-chief-warns-1980s-savings-and-loan.html
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