WASHINGTON -- The Federal Reserve approved new rules Wednesday to help limit discount window advances to troubled banks.
The rules, required by the Federal Deposit Insurance Corporation Improvement Act, guide the Fed's district banks on dealing with extended requests for credit from undercapitalized banks, as well as on advising lenders of the potential limitations of credit.
Passed unanimously, the rules enforce section 142 of the 1991 law. That provision made the Fed liable for certain losses to the Bank Insurance Fund, when a bank forestalls failure through discount window borrowings but later fails anyway.
Congress adopted the provision to discourage the Fed from propping up troubled banks for long periods.
A Hit at Superregulator Plan
Chairman Alan Greenspan used the newly adopted rules to demonstrate what Fed officials view as the unworkability of President Clinton's proposal to consolidate banking agencies.
Under that plan, the Fed would lose its supervisory powers but continue to extend credit through its discount window.
Mr. Greenspan pointed out the need for close cooperation between regulatory and monetary affairs employees - an impossibility under the administration plan - in developing the rules.
The chairman laid out his opposition to the administration proposal Wednesday in a Wall Street Journal opinion piece.
Under the rules approved Wednesday, the 12 district bans will be required to consult with the board for extended advances to undercapitalized banks. Fed liability due to these advances will be divvied up among the banks, after the district responsible for the losses absorbs a portion of them.
As of Dec. 19, when the Fed lends to a nonviable, undercapitalized lender that has borrowed 60 out of 120 days -- or when it lends to a critically undercapitalized lender five days after the rating was bestowed -- it is liable for losses to the BIF caused by the advances. In addition, the Fed must report this liability to Congress.
The board also approved a $1.9 billion budget for its district banks in 1994, a 4.1% increase from this year.
Sixty-five percent of reserve bank expenses will go to salaries and benefits. The Fed districts expect to cut 220 jobs next year, bringing their staff -- including those dedicated to special projects -- to 24,363.