Lawmakers Push Fed to Rein In Emergency Powers

WASHINGTON — More than a dozen bipartisan lawmakers urged the Federal Reserve to scale back its emergency lending authority in a pending rule required by the Dodd-Frank Act.

Dodd-Frank sought to limit the Fed's authority — mandated in section 13(3) of the Federal Reserve Act — to provide emergency aid to financial institutions. At the peak of the financial crisis, the central bank took unprecedented action to lend to banks at very low rates in an effort to keep the financial system afloat.

But the lawmakers, including both Democrats and Republicans in both chambers of Congress, warned that the Fed's proposed rule to implement the reform provision fails to adequately limit the agency's powers. They said it still leaves the door open for future bailouts. (The Fed had accepted comments on the proposal through early March, but has yet to issue a final rule.)

"If the Board's emergency lending authority is left unchecked, it can once again be used to provide massive bailouts to large financial institutions without any congressional action," the lawmakers wrote in an Aug. 18 letter to Fed Chair Janet Yellen. Signing the letter were Sens. Elizabeth Warren, D-Mass., and David Vitter, R-La., and Reps. Mike Capuano, D-Mass., and Scott Garrett, R-N.J., along with 11 of their colleagues.

"The Board's proposed rule fails to strike the appropriate balance between promoting financial stability and mitigating moral hazard among the largest financial institutions," they wrote.

The lawmakers called on the Fed to make several changes to the proposed rule, including setting clear limits on how long a financial institution can rely on emergency lending and establishing procedures for winding down any lending program. They also urged the central bank to adopt broader definitions for terms that define when institutions can participate in an emergency lending program, and to clarify that the agency will lend to banks at a "penalty rate" and not at below market prices.

For reprint and licensing requests for this article, click here.
Law and regulation Dodd-Frank
MORE FROM AMERICAN BANKER