Fed Set to Adopt Final Emergency Lending Rule

30 Nov 2015 | Author: | No comments yet »

Fed Set to Adopt Final Emergency Lending Rule.

The Federal Reserve on Monday is set to enact a new rule restricting its ability to lend money to financial institutions in a crisis in an attempt to ease concerns from lawmakers who worry about the central bank’s unchecked power to pump money into the financial system. A proposed rule, to be considered by the Fed’s Washington-based board in an open meeting, would require that any future emergency lending be only “broad-based” to address larger financial market problems, and not tailored to specific firms.

Many lawmakers worry the Fed was able to operate with relatively few restrictions as it tried to keep banks and other firms afloat during the last financial crisis. The 2010 Dodd-Frank financial reform law instructed the Fed to curtail emergency loans to individual banks and prohibited it from lending to companies considered insolvent. As the financial crisis intensified in 2008, the Fed invoked its little-used emergency lending power to stave off the failure of AIG and Bear Stearns, and help other “too big to fail” companies including Citigroup and Bank of America. Loans would come with a penalty rate and would have to be repaid in full on an accelerated basis if borrowers are found to have misrepresented their solvency. The loans have been repaid and the guarantees ended, ultimately earning the Fed a net profit of $30-billion, according to a September Congressional Research Service review.

However the effort was criticized as overreach, arguably important in limiting the crisis but also not clearly in line with the intended use of the Fed’s emergency authority. The Fed’s support of major banks and nonfinancial firms highlighted the risks of having companies that are considered too big to fail, and of the implicit promise that they would be rescued.

Elizabeth Warren (D., Mass.) and David Vitter (R., La.) urged the Fed in a letter last year to establish time limits for emergency lending programs, bar firms who might be “on the verge of bankruptcy” from receiving loans and ensuring the loans be dispersed across the financial sector rather than concentrated among a few big firms. ”The Federal Reserve has long had this authority but has used it only sparingly and only in severe financial crisis,” Ms.

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