Fed agrees to limit emergency lending powers

Fed agrees to limit emergency lending powers
© Greg Nash

The Federal Reserve finalized rules Monday that would place stricter restrictions on when the central bank could provide emergency loans to struggling firms.

The new rules would bar the central bank from providing emergency lending to a single failing firm, like AIG, and also would bar the Fed from making loans to insolvent firms.

The final rule, unanimously approved by the Fed, made several changes from a previously proposed rule that had come under heavy congressional scrutiny. The Dodd-Frank financial reform law had directed the Fed to establish new rules limiting its bailout powers.

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Lawmakers from both parties had blasted the proposed rule the Fed first drafted its proposed rule, saying it still granted too much leeway to the central bank, and left the door open for more bailouts similar to those granted in the 2008 crisis, when failing firms were given massive, low-interest loans to help stay afloat.

The Fed has been protective of its emergency lending powers, arguing it is a critical tool it can use to help stave off another crisis.

Fed Chairwoman Janet Yellen noted Monday that emergency lending powers have only been used “sparingly and only in severe financial crises.”

But in the final rule, the Fed agreed to adopt stronger restrictions first put forward by lawmakers like Sens. Elizabeth WarrenElizabeth Ann WarrenWarren warns another 'economic crash' is coming The Hill's Morning Report — Mueller Time: Dems, GOP ready questions for high-stakes testimony Biden's lead narrows in early voting states: poll MORE (D-Mass.) and David VitterDavid Bruce VitterLobbying World Senate confirms Trump judge who faced scrutiny over abortion views Collins votes against Trump judicial pick MORE (R-La.).

In response to the Fed’s proposed rule, the pair drafted legislation this spring that would limit the Fed’s bailout powers. Among the changes included in that bill were requiring any emergency lending be done to at least five firms at a time, to ensure no single firm receives direct aid from the Fed like AIG did. The bill also would have barred the Fed from making loans to insolvent firms, and require the Fed to charge significantly higher interest on its loans as a penalty to the firms requiring them.

Under the Fed’s final rule, it cannot extend emergency loans unless at least five firms are participating, and bars loans to firms that are    at least 90 days delinquent on outstanding debt.

The Fed’s new rule also says the central bank must charge a penalty rate on its loans, but does not specify exactly how much. Instead, it says the Fed must charge a rate that is higher than the going market, but not so high as to discourage participation or repayment under the program.